Sole Proprietor vs Company Tax Comparison (Korea)

This calculator compares the tax paid in a year on the same business run as a sole proprietorship and as a company. Enter the annual profit after expenses, the salary the director would draw if it were a company, and the number of basic-deduction dependants, and it shows income tax plus local tax on the individual side, and corporate tax plus local tax plus the employment tax on the director's salary on the company side, with both totals and the gap.

The key is that a company splits the profit in two. The director's salary is a company expense that leaves the corporate tax base and is taxed separately as the director's earned income, while the remaining profit stays in the company at the lower corporate rates. A sole proprietor's entire profit is one person's comprehensive income and climbs into the high progressive brackets. The calculator turns that structural difference into won.

Sole proprietors whose profits have grown to the point of asking whether to incorporate. Changing the profit and salary shows where the company's tax pulls clearly ahead and which salary level makes the gap widest. Someone choosing a form before starting a business uses it the same way.

This comparison looks only at this year's tax. Money left in the company still belongs to the company; the director must take it out as dividends or salary to use it, and that is taxed again. A sole proprietor's after-tax money is simply theirs. The result is therefore the upper bound of the company's advantage, and the more you take out, the smaller the gap.

The individual side uses the scale in 소득세법 제55조. Profit less ₩1.5 million of basic deduction per dependant is the base, taxed in eight steps from 6% to 45%, with 10% of the result added as local income tax. The company side uses 법인세법 제55조: 10% up to ₩200 million, 20% up to ₩20 billion and on up to 25% in four steps. Local corporate income tax really has its own table in 지방세법 제103조의20, but at the standard rates it equals 10% of the corporate tax, so it is simplified that way here.

The tax on the director's salary is computed the same way as a year-end settlement: gross salary less the earned income deduction and the basic deduction gives the base, the progressive scale applies, the earned income tax credit comes off and local tax goes on. The salary is capped at the profit. The order is: individual tax, corporate tax, salary tax, then corporate tax plus salary tax compared with the individual tax.

Take the default on screen: ₩100 million of annual profit, a ₩50 million director's salary and one dependant. The sole proprietor's base is ₩100 million less ₩1.5 million, or ₩98.5 million, and in the 35% bracket the income tax after the progressive deduction is ₩19,035,000, ₩20,938,500 with local tax. The company's base after the ₩50 million salary is ₩50 million, taxed at 10% for ₩5 million of corporate tax and ₩500,000 of local tax.

On the ₩50 million salary, the base after the earned income and basic deductions is ₩36.25 million, taxed at 15%; after the earned income credit and local tax it comes to ₩3,869,250. The company side totals ₩5.5 million plus ₩3,869,250, or ₩9,369,250, which is ₩11,569,250 less than the individual. Set the salary to zero and leave the whole profit in the company, and corporate plus local tax rise to ₩11 million, narrowing the gap to ₩9,938,500. Drawing part of the profit as salary is the better move because of the earned income deduction.

The biggest misconception is that a lower corporate rate makes a company always better. Money taken out of the company is taxed again as dividend income, and large dividends are pooled with other financial income for comprehensive taxation. Add that second layer and the company can end up level with, or worse than, the sole proprietor. This calculator leaves the second layer out, so read the result as the figure for profit that stays in the company.

The company's costs are missing as well. A company must keep double-entry books, pays for bookkeeping and closing, owes social insurance contributions on the director's salary, and any company money used privately becomes a shareholder loan that carries interest and tax. Schemes available only to sole proprietors, such as the 노란우산공제 savings deduction, are not in the comparison either. At modest profits those fixed costs easily outweigh the tax gap, so the right order is to check that the gap shown here comfortably exceeds them before deciding to incorporate.