When employees in Korea search for their expected severance pay, most calculators only show the gross (pre-tax) amount derived from average wage and years of service. But severance pay is still taxable income, so retirement income tax (퇴직소득세) is withheld at source, and what actually lands in your bank account is the after-tax net amount. The gap between gross and net becomes especially noticeable for larger payouts or shorter tenures — yet few resources explain this clearly. This guide walks through how the gross severance figure is derived, then how Korea's retirement income tax is calculated step by step, so you can estimate what you will actually receive.
1. How the Gross Severance Pay Amount Is Determined
Korea's statutory severance pay formula is:
Severance Pay = Average Daily Wage × 30 × (Total Days Employed / 365)
The key variable is the average daily wage. Under the Labor Standards Act, average wage is defined as the total wages paid during the three months immediately before separation, divided by the total number of calendar days in that period.
Average Daily Wage = (Total Wages Paid in the Final 3 Months / Total Calendar Days in That Period (approx. 89–92 days))
This wage total includes not just base salary but also a pro-rated portion of regular bonuses and unused annual leave allowances paid during that window. Importantly, if the calculated average wage turns out lower than the employee's ordinary wage, the ordinary wage is used instead — a safeguard that prevents severance pay from being understated.
In short, the gross figure is "a daily wage based on the last three months, multiplied by 30 days, multiplied by years of service" — and this is typically all a basic severance calculator shows you. The catch is that this gross figure is not the amount you actually take home.
2. Why and How Retirement Income Tax Is Calculated
Because severance pay is a single lump-sum payout rather than income spread across many months, taxing it the same way as regular monthly salary would push it into disproportionately high progressive tax brackets. To soften this, Korean tax law applies a distinctive multi-step procedure: years-of-service deduction → converted (annualized) income → converted income deduction → the "annualization and re-conversion" method.
Step 1: Years-of-Service Deduction
The longer the tenure, the larger this deduction becomes.
| Years of Service | Deduction Amount |
|---|---|
| 5 years or less | Years of service x KRW 1 million |
| 5–10 years | KRW 5 million + (years - 5) x KRW 2 million |
| 10–20 years | KRW 15 million + (years - 10) x KRW 2.5 million |
| Over 20 years | KRW 40 million + (years - 20) x KRW 3 million |
Step 2: Converted (Annualized) Income
Subtract the years-of-service deduction from the taxable severance amount, divide by years of service, then multiply by 12 to "annualize" it into a one-year equivalent figure.
Converted Income = ((Taxable Severance Amount - Years-of-Service Deduction) / Years of Service) × 12
Step 3: Converted Income Deduction
A further bracketed deduction is applied to the converted income.
| Converted Income Bracket | Deduction |
|---|---|
| Up to KRW 8 million | Fully deductible |
| KRW 8M–70M | KRW 8M + (converted income - 8M) x 60% |
| KRW 70M–100M | KRW 45.2M + (converted income - 70M) x 55% |
| KRW 100M–300M | KRW 61.7M + (converted income - 100M) x 45% |
| Over KRW 300M | KRW 151.7M + (converted income - 300M) x 35% |
Step 4: Taxable Base and Standard Tax Rates
Converted income minus the converted income deduction gives the converted taxable base, to which Korea's standard progressive income tax rates (6–45%, the same brackets used for comprehensive income tax) apply.
| Taxable Base | Rate | Progressive Deduction |
|---|---|---|
| Up to KRW 14M | 6% | - |
| KRW 14M–50M | 15% | KRW 1.26M |
| KRW 50M–88M | 24% | KRW 5.76M |
| KRW 88M–150M | 35% | KRW 15.44M |
| KRW 150M–300M | 38% | KRW 19.94M |
| KRW 300M–500M | 40% | KRW 25.94M |
Step 5: Re-Converting Back with the Annualization Method
The "converted calculated tax" derived from applying the rate to the taxable base is then divided back down by years of service to restore it to the original, non-annualized scale.
Converted Calculated Tax = (Taxable Base × Rate) - Progressive Deduction
Final Retirement Income Tax = (Converted Calculated Tax / 12) × Years of Service
This sequence — deduct first by years of service, annualize to land in a lower rate bracket, then divide back down by years of service — means the same lump sum ends up taxed at a much lower effective rate than ordinary employment income would be.
3. Gross vs. Net Comparison by Tenure and Payout Size
Plugging real numbers into the formula above makes the effect much easier to grasp. The table below shows simplified example scenarios across different tenure lengths and gross severance amounts (assuming no non-taxable income or prior partial-settlement history, for illustration purposes).
| Years of Service | Gross Severance Pay | Estimated Retirement Tax | Net After-Tax Amount | Effective Rate |
|---|---|---|---|---|
| 5 years | KRW 30M | ~KRW 0.77M | ~KRW 29.23M | ~2.6% |
| 10 years | KRW 60M | ~KRW 1.25M | ~KRW 58.75M | ~2.1% |
| 20 years | KRW 100M | ~KRW 1.12M | ~KRW 98.88M | ~1.1% |
| 30 years | KRW 200M | ~KRW 3.45M | ~KRW 196.55M | ~1.7% |
| 25 years | KRW 300M | ~KRW 12.38M | ~KRW 287.62M | ~4.1% |
As the table shows, the effective tax rate on severance pay is significantly lower than employment income tax or comprehensive income tax rates. Longer tenure tends to ease the tax burden further, thanks to the compounding effect of the years-of-service deduction and the annualization method. Conversely, a large payout (including honorary retirement bonuses) combined with relatively short tenure can push the effective rate noticeably higher.
4. Why the Tax Burden Varies by Situation
Longer tenure works in your favor
The years-of-service deduction itself scales up with tenure, and years of service is also the divisor in the converted income formula — a double benefit. As a result, employees with longer careers tend to land in lower effective tax brackets even with the same gross severance amount.
Honorary or voluntary retirement bonuses raise the tax
When a special bonus is added on top of standard severance pay (common in honorary or voluntary early retirement programs), the taxable severance base itself increases, pushing the converted income into a higher bracket and raising the applicable rate. Estimating the net amount in advance is especially important in these cases.
Prior partial settlements or IRP transfers change the math
If you previously received a partial severance settlement or if severance pay is being transferred into an IRP (Individual Retirement Pension) account, the calculation basis for years of service and tax deferral can differ. These cases are best verified with your company's HR/payroll team or a tax professional rather than a basic calculator.
Actual tax liability varies by individual circumstances
The table above is a simplified illustration. The final amount received can vary depending on non-taxable income components, an additional 10% local income tax surcharge on the retirement tax, and how your employer processes withholding. Always double-check the exact figure against your official pay statement or tax authority records.
5. Frequently Asked Questions (FAQ)
Q1. Is there a local income tax on top of the retirement income tax?
A1. Yes. In addition to the national retirement income tax, a local income tax equal to 10% of the retirement income tax is withheld separately. Adding roughly 10% to the estimated tax figures above gets you closer to the actual total deduction.
Q2. If severance pay is transferred to an IRP account, is tax avoided entirely?
A2. Transferring to an IRP defers the retirement income tax rather than eliminating it. No tax is withheld immediately; instead, if you later withdraw the funds as a pension over time, you can benefit from a reduced tax rate. If you withdraw it as a lump sum instead, the retirement income tax described in this guide is withheld immediately at that point.
Q3. How precisely is years of service counted for the deduction?
A3. In practice, partial years under one full year are generally rounded up when calculating the years-of-service deduction and applying the annualization method. Exact treatment can vary by employer payroll system, so confirm the precise tenure calculation with your HR department.
Q4. What if the employer withheld the wrong amount of retirement tax?
A4. If you believe the amount withheld by your employer was incorrect, you can request a correction or file for reassessment during the comprehensive income tax filing season (typically May of the following year). For significant discrepancies, consulting a tax professional is recommended.
6. Estimate Your After-Tax Severance Pay With a Calculator
Manually working through average wage, years-of-service deductions, and converted income brackets is tedious and error-prone. Our free Severance Pay Calculator lets you enter your average wage and tenure to instantly see not just the gross severance amount, but an estimated retirement income tax and the resulting after-tax net amount, factoring in the years-of-service and converted income deductions. If you are planning a job change or retirement, it is worth checking the real amount you will receive in advance. If you are also curious about take-home pay from a regular salary, see our Salary Take-Home Pay guide.
