Severance tax is set by years served, not by the amount — how the same ₩100M severance became ₩264K or ₩10.36M

Two people each receive ₩100M in severance. One pays ₩264,000 in tax; the other pays ₩10,360,625. The company is not different and neither is the amount. The only thing that differs is how long they worked there. The 30-year employee pays ₩264K; the 5-year employee pays ₩10.36M. Severance tax is set not by what you received but by how many years it is spread over.

Retirement income is classified income. It is calculated on its own, never added to wage or business income, and that is the end of it. Severance is thirty years of accrual paid out in the final year, not one year's earnings, while income tax is progressive, with higher rates on higher annual income. Count thirty years as one year's income and the rate jumps to the top bracket. So the law installs two devices: a deduction that grows with years served, and a conversion that spreads the money back out as if it were one year's pay. The tax looks small not as a favor but because the law refuses to count money earned over many years as if it were earned in one.

The first device is the service-years deduction, a fixed amount subtracted from severance according to years served: ₩5M at 5 years, ₩15M at 10, ₩40M at 20, ₩70M at 30. From the same ₩100M, the 5-year employee is left with ₩95M and the 30-year employee with ₩30M. One condition is attached: if severance is less than the deduction, the whole severance becomes the deduction. Receive ₩30M after 20 years and the ₩40M deduction absorbs all of it, leaving a tax base of ₩0 and tax of ₩0. This table was amended in December 2022 and applies to retirements on or after 1 January 2023.

The converted-pay deduction can also bring the tax to zero. Receive ₩50M after 20 years: ₩10M remains after the ₩40M service-years deduction. Divide by 20 and multiply by 12 and the converted pay is ₩6M. The converted-pay deduction covers everything up to ₩8M, so all ₩6M is deducted. Tax base ₩0, tax ₩0.

Back to the two people. The 5-year employee's deduction is only ₩5M, leaving ₩95M; divide by 5 and multiply by 12 and the converted pay is ₩228M. Spreading five years' worth over one year actually made it bigger. Hence ₩10,360,625 in tax, an effective rate of 10.36%. At 10 years it is ₩4,262,500 (4.26%), at 20 years ₩1,232,000 (1.23%), at 30 years ₩264,000 (0.26%). The gap between 5 and 30 years is about 39 times.

One easy misreading needs clearing up. Longer service does mean less tax, but the severance itself grows with service. Today's calculation fixed the severance at ₩100M to show the tax structure alone. Severance accrues at 30 days of average wages for every year worked, so longer service brings a larger severance, and a larger amount brings more tax. With the same 20 years of service, ₩200M costs ₩7,727,500 and ₩300M costs ₩19,844,000.

Three things are settled before you retire. First, years of service: the hire date and the planned leaving date are all it takes, and they also fix which row of the deduction table you fall in. Second, the rough size of the severance: average wages over the final three months are the base, and company rules or the retirement-pension balance give a good estimate. Third, once those two are set, the tax is set. And years of service cannot be added after you leave. A few months can move you into a different deduction band, so if you can choose your leaving date, run the numbers first.

Some people worry about filing. The law does say retirement income must be reported the following May, but there is a proviso: if the company withheld the severance tax before paying, that filing is not required. Most companies withhold, so there is usually nothing to do. If you received severance from several companies, or the company did not withhold, then you file yourself. Still, retirement is not a decision to make on tax alone. Tax is one number to feed into the decision, not the decision itself.

Two things to do now. First, check your hire date and count your years of service. Second, estimate your severance from your average wages over the last three months. Those two are enough to produce the tax. Today's story covers ordinary severance only: executive severance caps, retirement pensions taken as an annuity, and earlier interim settlements all change the calculation. For large amounts, have a tax adviser confirm.