Why is the amount deposited into your account on payday lower than the salary stated in your employment contract?
This is because your employer deducts income tax, local income tax, social insurance contributions, and other amounts before paying your salary. Tax withholding is a system in which the payer deducts taxes, such as income tax, before paying income and then remits those taxes to the appropriate tax authority.
Tax withholding does not mean that your employer is arbitrarily taking part of your salary. It is a process in which the employer collects taxes according to established rules and pays them to the tax authority on behalf of the employee.
However, the income tax withheld from each paycheck does not always equal the employee’s final tax liability for the year. The tax deducted each month is closer to an estimated amount, while the actual annual tax is recalculated during the year-end tax settlement.
What Is Tax Withholding?
Tax withholding is a system in which the payer deducts and remits taxes before the recipient pays those taxes directly.
For an employee, the employer is the withholding agent and the employee receiving the salary is the income recipient. The employer deducts income tax when paying the employee and reports and remits the tax by the required deadline.
Tax withholding does not apply only to employment income. Different withholding methods may also apply to interest income, dividend income, pension income, certain business income, and other types of income.
Because the calculation basis, tax rate, and settlement method vary by income type, the withholding method for employment income should not be applied directly to other types of income.
The Three Parties Involved in Tax Withholding
The tax withholding process involves the income recipient, the withholding agent, and the tax authority.
Income recipient: The person who receives a salary or other income and bears the tax liability.
Withholding agent: The employer or business that deducts, reports, and remits taxes when paying income.
Tax authority: The government authority that manages withheld taxes and oversees the reporting and settlement of the final tax liability.
Although employees bear the tax liability, they do not calculate and pay their income tax directly every month. After withholding taxes from the salary, the employer pays the employee the take-home amount remaining after taxes and other deductions.
Why Are Taxes Deducted from Your Paycheck in Advance?
Employment income is generally earned each month. Because paying an entire year’s income tax at once could create a significant burden, an estimated portion is withheld whenever a paycheck is issued.
The government can also collect taxes when income is paid instead of waiting for each employee to pay individually. Employees pay their taxes gradually each month, while employers report and remit the withheld amounts according to established procedures.
However, tax withholding does not determine the final tax liability. Because the employee’s total annual salary, income deductions, and tax credits have not yet been fully reflected, the monthly amount withheld may differ from the final tax owed.
How Is Employment Income Tax Withholding Calculated?
An employer does not arbitrarily decide how much income tax to deduct each month. In principle, income tax withholding on employment income is calculated using the Simplified Tax Withholding Table for Earned Income.
The Simplified Tax Withholding Table shows the monthly tax to be withheld according to factors such as monthly salary and the number of eligible dependents.
Therefore, even employees with the same salary may have different amounts of income tax withheld depending on their tax-exempt pay, number of eligible dependents, and selected withholding percentage.
It is easy to assume that withholding tax is calculated by applying a single tax rate to your salary, but employment income tax withholding is not that simple. Comparing your tax directly with someone else’s based only on the total gross pay shown on a pay stub may lead to an incorrect conclusion.
The amount withheld may differ from usual in a month when you receive a bonus or when your tax-exempt allowances change. If your tax deduction changes unexpectedly, review the composition of your salary and allowances, your dependent information, and whether a bonus was paid.
What Do the 80%, 100%, and 120% Withholding Options Mean?
Employees may request a withholding percentage of 80%, 100%, or 120% of the tax calculated under the Simplified Tax Withholding Table.
The 100% option represents the standard tax amount shown in the table. Choosing 80% reduces the amount of income tax withheld each month, while choosing 120% increases it.
Choosing the 80% option does not reduce your total tax liability. Withholding less each month may increase the possibility of owing additional tax during the year-end tax settlement.
Conversely, choosing 120% reduces your monthly take-home pay but may help lower the possibility of owing additional tax at the year-end settlement. However, the actual result will depend on each person’s income deductions and tax credits.
These percentages are not a tax-saving method but rather a way to adjust the timing of your tax payments.
Why Does the Withheld Amount Differ from the Final Tax?
The tax withheld each month is an estimated amount calculated using monthly salary and limited information.
In contrast, the final tax is calculated using total annual employment income and may reflect employment income deductions, personal exemptions, insurance premiums, medical expenses, education expenses, donations, and various tax credits.
During the year-end tax settlement, the final tax liability is compared with the total amount withheld by the employer throughout the year.
If the amount withheld exceeds the final tax liability, the difference is refunded.
If the amount withheld is lower than the final tax liability, the difference must be paid.
Receiving a large refund does not necessarily mean that you saved a large amount in taxes. The refund may have resulted from paying more tax in advance each month than your final tax liability.
Owing additional tax does not necessarily mean that the tax was calculated incorrectly. It simply means that the final tax liability exceeded the amount paid in advance each month, so the difference must be settled.
How to Check the Amount Withheld from Your Paycheck
When reviewing your actual pay stub, refer to the seven items on a payslip that show taxes and deductionsto review your withheld taxes and take-home pay in the correct order.
Check the following items on your pay stub.
Total gross pay
Tax-exempt pay
Income tax
Local income tax
Social insurance contributions
Other deductions
Total deductions and take-home pay
Income tax and local income tax are taxes, while national pension, health insurance, long-term care insurance, and employment insurance payments are social insurance contributions. Although they are deducted from the same paycheck, they serve different purposes.
If the income tax on your pay stub differs significantly from the previous month, first check for a salary increase, bonus payment, change in dependent information, or change in your withholding percentage.
You can review your Wage and Salary Income Withholding Receipt to check your annual employment income and the amount of tax withheld. This document shows your total salary, deductions, final tax liability, and taxes already paid.
A Simple Example of How Tax Withholding Works
The following is a simplified example designed to explain the tax withholding process.
Total monthly gross pay: KRW 3 million
Tax-exempt pay: KRW 200,000
Monthly salary used to check the simplified tax table: KRW 2.8 million
Number of eligible dependents: One, including the employee
Withholding percentage: 100%
The employer checks the current Simplified Tax Withholding Table for the tax amount corresponding to the employee’s monthly salary and number of eligible dependents.
The employer deducts the applicable income tax and local income tax, followed by social insurance contributions and other deductions, and then pays the remaining take-home amount.
This example does not provide a fixed income tax amount because the simplified tax table may be revised and the result can vary according to each person’s salary composition and family information.
To determine the actual amount, use the National Tax Service’s Simplified Tax Withholding Table that applies when the salary is paid.
Common Misunderstandings About Tax Withholding
1. The Withheld Amount Is the Final Tax
The tax deducted each month may not be your final tax liability. Employees generally recalculate their actual annual tax through the year-end tax settlement.
2. A Larger Year-End Refund Means Greater Tax Savings
A refund may reflect both the effect of income deductions and tax credits and the fact that too much tax was withheld each month.
3. The Employer Can Decide the Withholding Amount Arbitrarily
The employer calculates the tax using the Simplified Tax Withholding Table and information submitted by the employee. If you believe the tax shown on your pay stub may be incorrect, ask your payroll department to confirm the calculation basis and the family information on file.
4. Employees with the Same Salary Always Pay the Same Income Tax
Even when salaries are the same, the monthly tax withheld may differ because of tax-exempt pay, the number of eligible dependents, and the selected withholding percentage.
5. Every Amount Deducted from a Paycheck Is a Tax
Social insurance contributions and other payroll deductions are not all taxes. You should distinguish taxes, insurance contributions, and other deductions when reviewing your pay stub.
How to Manage Take-Home Pay After Tax Withholding
After confirming the amount actually deposited after tax withholding, you can apply four steps for dividing your paycheck among income, fixed-expense, living-expense, and savings accountsto manage the money available each month by purpose.
Your living-expense and savings budgets should be based on take-home pay after taxes and social insurance contributions, not on your gross salary.
If your take-home pay varies each month because of bonuses or allowances, it is safer not to build your budget around your highest-paying month. Use an amount that you have consistently received over the past several months as the basis for your living expenses and savings.
Tax Withholding Checklist
Did you check income tax and local income tax separately on your pay stub?
Did you distinguish total gross pay from tax-exempt pay?
Is your eligible dependent information registered correctly?
Do you know whether your withholding percentage is set at 80%, 100%, or 120%?
Did you check whether a bonus or allowance changed the amount of tax withheld?
Did you avoid confusing social insurance contributions with income tax?
Did you check the final tax liability and taxes already paid on your Wage and Salary Income Withholding Receipt?
Did you determine why you received a refund or owed additional tax after the year-end tax settlement?
ConclusionConclusion
Tax withholding is a system in which an employer deducts taxes from an employee’s salary in advance and remits them to the appropriate tax authority.
The income tax deducted from your paycheck is closer to a tax payment made in advance than to your final tax liability. After your total annual employment income and applicable deductions are reflected, the amount paid in advance is compared with the final tax liability to determine whether you receive a refund or owe additional tax.
On your pay stub, distinguish income tax, local income tax, social insurance contributions, and other deductions. If your take-home pay differs from what you expected, review not only your total gross pay but also your tax-exempt pay, bonuses, dependent information, and withholding percentage.
This article provides general financial and tax information. Individual tax amounts and filing requirements may vary according to the type of income and eligibility for deductions, so consult the National Tax Service or a qualified tax professional when specific guidance is required.
References
National Tax Service, Tax Withholding System https://www.nts.go.kr/nts/cm/cntnts/cntntsView.do?cntntsId=7701&mi=2318
National Tax Service, Employment Income Tax Withholding Method and Simplified Tax Table https://www.nts.go.kr/nts/cm/cntnts/cntntsView.do?cntntsId=7862&mi=6583
Korean Law Information Center, Income Tax Act Article 134: Timing and Method of Withholding Tax on Employment Income https://www.law.go.kr/LSW//lsLawLinkInfo.do?chrClsCd=010202&lsId=001565&lsJoLnkSeq=1000821267&print=print