South Korea, a vibrant and technologically advanced country in East Asia, boasts a thriving economy with a highly skilled workforce. As businesses expand and globalize, understanding the intricacies of payroll in South Korea becomes crucial for successful operations. Payroll, the process of calculating and distributing wages to employees, plays a pivotal role in South Korea’s employment landscape.
With its unique regulatory framework, compliance requirements, and cultural nuances, navigating the payroll system in South Korea requires specialized knowledge and expertise.
If you are interested in knowing about the process of incorporating a new company here, refer to South Korea company formation.
PAYROLL PROCESS IN SOUTH KOREA
There are three main phases of payroll:
This is where the applicant establishes the company and constructs the fundamental foundation needed by regional regulatory bodies to run a business in any particular area.
If they are not a legal organization that has been registered and issued a license, they cannot manage any payroll procedures let alone pay employees.
To accomplish this, the applicant must take several crucial steps, such as:
- The applicant will need a registered number or code for the firm as an employer to comply with fundamental regulatory requirements, as well as for communication and future tax compliance.
- For regulatory and compliance reasons, it is also crucial that the company has an official and formal business address (or addresses, if they have multiple subsidiaries or locations).
- A leave policy is not a question of unnecessary formality in any company.
Instead, every company needs a leave policy to compute payroll for future compliance and reporting requirements as well as to track employee performance.
- An attendance policy is created to monitor employee performance as well as for future compliance and reporting obligations. It is similar to and just as significant as a leave policy.
- Among other things, the payroll procedure involves fundamental legal requirements that every employer must meet to do lawful business in any particular jurisdiction.
This requires an international employer to fully comprehend and follow any laws, rules, or policies in effect in your country.
- As an international employer, they must create a special pay structure that takes into account the internal company policies and draws in more highly qualified individuals in addition to the basic statutory remuneration required by law.
Accordingly, pay components should be adaptable enough to handle both required salary components (such as the minimum wage and benefits) and optional compensation components the applicant may add to enhance the employer brand’s reputation internationally.
- Employees and independent contractors emphasize this above all else, especially in uncertain or challenging economic times.
They could implement more flexible payment schedules in addition to the traditional fixed payment day to meet the needs of the workforce.
Additionally, flexible payment plans offer the added advantage of luring and keeping talent who, above all other employment criteria, value flexibility the most.
- Payroll administration is a data-intensive task. Employee data collection is one of the pre-payroll phase’s data collection operations.
Employee information is essential for eventual regulatory and compliance purposes, in addition to internal management control uses (such as controlling employee attendance, leaves, performance, etc.).
PAYROLL CALCULATION PHASE IN SOUTH KOREA
Payroll calculations include, but are not limited to, salaries, wages, withholdings, deductibles, and social insurance contributions.
Payroll calculations serve multiple purposes, including paying employees as well as performing accounting, auditing, compliance, and reporting tasks in the future.
Payroll calculations can be made locally or, if funds permit, by using South Korean payroll services.
Employees must be paid as a preliminary step to concluding the payroll procedure in accordance with the specified local rules and regulations as well as based on mutual contractual agreements.
Around the world, businesses pay their staff members and independent contractors on a weekly, monthly, or hourly basis.
Additionally, it is customary and conventional practice to deposit salaries and wages into corporate bank accounts. Alternatively, a business may automate salary and wage payments by hiring a payroll provider such as Relin Consultants.
By making sure the payroll records are prepared for later form-filling and reporting operations as required by law, they can move closer to regulatory and compliance problems at this point.
All payroll components, such as salaries or wages, social insurance, benefits, deductibles, etc., must be included in this, along with any additional payroll costs for handling the payroll process.
Payroll Reporting and Compliance
The payroll process is completed by completing all necessary tax forms, ensuring that they report all necessary company earnings by established deadlines, and notifying the appropriate regulatory organizations.
The aforementioned three-step payroll procedure is used universally.
PAYROLL COMPONENTS IN SOUTH KOREA
In South Korea, labor law is defined by the Labor Standards Act 5309 of 1997, which covers basic employment requirements in areas such as contracts, leaves, termination, working hours, and more.
For the time being, the following factors are most important for an international employer looking to hire and compensate employees in South Korea:
- Compensation – As of January 1st, 2021, employees are entitled to a minimum salary of KRW 822,480 per month or KRW 8,720 per hour.
- Overtime Laws – Employees may, upon mutual agreement, work up to 12 additional hours per week under the Labour Standards Act of South Korea. in exchange for an extra 50% of the base pay or compensation.
- Working Hours
- Set at eight hours per day or 40 hours per week.
- If it is done between 11:00 p.m. and 6:00 a.m., it is considered night work.
- Social Security
Employers and employees split social security contributions as a proportion of monthly wages as follows:
- For national insurance, 50% to 9%.
- For national health insurance, 50% of 6.86%
- For long-term care insurance, 50% of the 11.52% health insurance premium
- 0.6%–18.5% for industry-specific assurance of industrial accident compensation
- 0.13–0.1% for the assurance of industrial accident compensation on incidents while commuting
- 50 % of 1.6% for unemployment insurance
- For job security and vocational capacity insurance, 0.25 to 0.85%
- 50% of the 11.52% health insurance premium for long-term care insurance
LEAVE PROCESS IN SOUTH KOREA
Paid Time off
In South Korea, paid leave is defined in the employment contract as a minimum of 11 days of paid leave per year, plus public holidays, beginning after one year of service. When the employee is in their second and third year of employment, this leave is increased to 15 days of paid leave. Once every third year of service is completed, up to a maximum of 25 days of paid leave, one additional day of leave is added to the entitlement. Employer discretion is used for the carryover allowance.
Some public holidays that fall on weekends are transferred to the next working day as an alternative day off.
Public holidays and alternative holidays (formerly unpaid) must now be paid days off for private businesses with five to 29 employees.
In South Korea, sick days are not required by law, although they are frequently provided as a benefit.
Maternity benefits, which include 90 days of paid leave for all female employees, can be extended to 120 days in cases of multiple or problematic births. Typically, maternity leave is taken 45 days before and 45 days after the due date.
Employer payments, government and social security payments, and payments are used to cover the cost of maternity leave. The maternity pay shall be paid at 100.00% of the usual salary rate for the first 60 days for larger enterprises in South Korea.
Following that, the social security system or the government will pay a support allowance for the remaining 30 days (up to a maximum of two million KRW per 30 days), and the employer will have the option of paying the difference between that amount and the employee’s regular salary rate. For small businesses, social security and the government assist the employer for the whole 90 days.
From the day the child is born up to 90 days later, the father is entitled to a minimum of 10 days of required paid paternity leave, of which five are paid by the employer and five by social security or the government.
A full-time or part-time childcare leave of up to one year may be requested by parents of children under the age of eight. A request for leave with an allowance provided by social security/government should be sent to the employer at least 30 days before the commencement of the leave term.
Beginning on January 1, 2022, both parents will earn 100% of their monthly income if one or both of them take parental leave during the first year after the birth of their child, as opposed to the former arrangement in which one parent received 100% and the other received a reduced payment of 80%.
TERMINATION PROCESS IN SOUTH KOREA
In South Korea, the procedure for terminating an employee is standardized and typically based on two primary causes. According to the Korean Labour Standards Act, the employer must demonstrate that the reason for the termination is both reasonable and permissible under the law. Additionally, before firing an employee in Korea, the employer must demonstrate that there is an urgent managerial need.
There is no required notice time under South Korean general labor legislation unless it is specified in the job contract or company manual. Nevertheless, giving a month’s notice is customary.
Employers must implement a system of retirement benefits. The statutory system of severance pay is the standard; under this system, an employee who has worked for an employer for at least a year and is terminated for any reason (including resignation) is entitled to severance pay equal to 30 days’ average wages (generally, all wages, including any bonuses paid within the previous three months) for each year of continuous service.
For permanent employees, South Korea offers optional one- to three-month probationary periods. Since the business must cover unemployment benefits, it is uncommon for employers to terminate a contract after the probationary period or training has ended.
These are progressively evaluated as a % of employment income and surtax in the manners listed below:
- 6% — zero to KRW 12 million
- 15% (plus KRW 0.72 million) — KRW 12 million to KRW 46 million
- 24% (plus KRW 5.82 million) — KRW 46 million to KRW 88 million
- 35% (plus KRW 15.90 million) — KRW 88 million to KRW 150 million
- 38% (plus KRW 37.60 million) — KRW 150 million to KRW 300 million
- 40% (plus KRW 94.60 million) — KRW 300 million to KRW 500 million
- 42% (plus KRW 174.60 million) — KRW 500 million to KRW 1 billion
- 45% (plus KRW 384.60 million) — KRW 1 billion and above
ADVANTAGES OF OUTSOURCING PAYROLL SERVICES IN SOUTH KOREA
- Expertise and Compliance: Payroll outsourcing companies in South Korea specialize in local payroll regulations and have a deep understanding of complex labor laws and tax requirements. By outsourcing, businesses can ensure accurate and compliant payroll processing, reducing the risk of penalties or legal issues.
- Cost Savings: Managing payroll in-house requires significant investment in infrastructure, software, and trained staff. Outsourcing payroll eliminates the need for such investments and allows businesses to streamline their operations, leading to cost savings. Additionally, outsourcing avoids the costs associated with hiring and training payroll professionals.
- Time Efficiency: Payroll processing involves various tasks, such as calculating wages, managing deductions, preparing reports, and ensuring timely payments. By outsourcing these tasks to a specialized provider, businesses can free up valuable time and resources to focus on core activities and strategic initiatives.
- Confidentiality and Security: Payroll data contains sensitive information about employees, including salary details and personal identification. Outsourcing to reputable payroll service providers ensures the confidentiality and security of this data. These companies employ robust security measures and adhere to strict data protection regulations, mitigating the risk of data breaches or unauthorized access.
- Scalability and Flexibility: As businesses grow or undergo changes, managing payroll requirements can become complex. Outsourcing payroll services provides scalability and flexibility, as providers can easily adapt to changing payroll needs, such as adding or removing employees, accommodating different pay structures, and handling employee benefits.
- Access to Technology: Payroll outsourcing companies often leverage advanced payroll software and technology solutions. By outsourcing, businesses can gain access to these tools without the need for individual investment. This technology can streamline payroll processes, improve accuracy, and provide self-service options for employees, enhancing overall efficiency.
Reach out to us at Relin Consultants for further assistance with our payroll services.
What is the minimum compensation for employees in South Korea?
As of January 1st, 2021, employees in South Korea are entitled to a minimum compensation of KRW 822,480 per month or KRW 8,720 per hour.
How many working hours are considered standard in South Korea?
The standard working hours in South Korea are 40 hours per week or eight hours per day
Are there provisions for overtime work in South Korea?
Yes, under the South Korean Labor Standards Act, employees can work up to 12 additional hours per week as overtime, upon agreement. They are entitled to receive an additional 50% of their base salary or wage for overtime work.
How are social security contributions handled in South Korea?
Social security contributions in South Korea are shared between employers and employees. The contributions include various components such as national insurance, national health insurance, long-term care insurance, industrial accident compensation assurance, unemployment insurance, and job security and vocational capability insurance.
What are the parental leave provisions in South Korea?
South Korea has extended parental leave for both fathers and mothers. Paternity leave is granted for 10 days for childcare and 90 days for childbirth. Reduced working hours (15 to 35 hours per week) are available for up to one year for child care of children eight years old and younger.
What are some of the public holidays in South Korea?
Public holidays in South Korea include New Year’s Day, Lunar New Year’s Day (“Seollal”), Independence Movement Day (“Sam Il Jul”), Children’s Day (“Uhrininal”), Buddha’s Birthday, Memorial Day, Independence Day (“Kwang Bok Jul”), Harvest Moon Festival (“Chuseok”), National Foundation Day (“Kae Chun Jul”), and Christmas Day.
How are payroll taxes calculated in South Korea?
Payroll taxes in South Korea are levied progressively based on income brackets. The tax rates range from 6% to 45%, with additional surtaxes applied at higher income levels.
What are some important labour-related laws in addition to the Labor Standards Act in South Korea?
Besides the Labor Standards Act, some other important labour-related laws in South Korea include the Occupational Safety and Health Act of 2011, the Equal Employment Opportunity and Work-Family Balance Assistance Act of 2007 (amended 2019), and the Employment Insurance Act of 2011 (amended 2019).