Severance Pay in Korea: Eligibility, Calculation, and Tax Guide
Everything you need to know about severance pay in Korea — who qualifies, how it's calculated, tax implications, and interim settlement rules.
Severance pay (퇴직금) is a legally mandated benefit for employees in Korea. When you leave a job after working for at least one year, your employer must pay you a lump sum based on your tenure and salary. Understanding how it works is essential for career planning and financial management.
Who Qualifies for Severance Pay?
Under the Korean Labor Standards Act, the following conditions must be met:
- Employed for at least 1 year continuously
- Average working hours of 15 or more per week
- Applies to all employment types: full-time, part-time, contract, temporary
- Applies regardless of the reason for leaving (resignation, layoff, retirement, contract expiration)
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Severance Pay Calculator →Severance Pay Calculation Formula
The legal formula for severance pay is:
- Step 1: Calculate Daily Average Wage = (Total wages for last 3 months) ÷ 90 days
- Step 2: Severance Pay = Daily Average Wage × 30 × (Total Working Days ÷ 365)
- Example: Monthly salary ₩3,000,000, worked 3 years (1,095 days)
- Daily Average Wage = (₩3,000,000 × 3) ÷ 90 = ₩100,000
- Severance Pay = ₩100,000 × 30 × (1,095 ÷ 365) = ₩9,000,000
The 'average wage' includes base salary, fixed allowances, and regular bonuses. If your regular wage (통상임금) is higher than your average wage, the regular wage is used instead.
Retirement Income Tax on Severance Pay
Severance pay is subject to retirement income tax (퇴직소득세), which is generally lower than regular income tax. The tax calculation considers:
- Years of service deduction: longer service = lower tax
- Converted severance deduction based on service period
- Progressive tax rates applied to the reduced amount
- For most workers with 5-10 years of service, effective tax rate is 2-5%
Interim Severance Settlement (중간정산)
Since 2012, interim settlement of severance pay during employment is generally prohibited. However, exceptions are allowed for:
- Purchasing a home (including mortgage repayment)
- Paying Jeonse deposit for rental housing
- Medical treatment for more than 6 months
- Bankruptcy or personal rehabilitation proceedings
- Natural disaster damage
- Salary peak system (임금피크제) application
If you receive an interim settlement, your severance calculation resets from the settlement date.
Frequently Asked Questions
What is the difference between severance pay and retirement pension?
Severance pay (퇴직금) is a lump sum paid upon leaving. A retirement pension (퇴직연금) is a system where the employer regularly contributes to a pension fund. There are two types: DB (defined benefit, similar to traditional severance) and DC (defined contribution, where the employee manages investments).
Can my employer refuse to pay severance?
No. Severance pay is legally mandated. If an employer fails to pay within 14 days of the employee's departure, they face penalties. Employees can file a complaint with the Labor Board (노동위원회) or take legal action.
Does overtime pay count toward severance calculation?
Yes, if overtime is regularly and consistently worked. The average wage calculation includes all wages received in the last 3 months, including overtime pay, night work allowance, and holiday work allowance that were regularly paid.
What if I worked less than 1 year?
Unfortunately, employees who worked less than 1 year are not entitled to severance pay under Korean law. However, if your employment contract or company policy provides for prorated severance, you may still receive some compensation.
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Seokjun
Founder of QuickFigure. Building tools that make complex calculations and document tasks simple for everyone.
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