After withholding tax, pay 10% local income tax on Wetax by the 10th

If your company in Korea withholds income tax from salaries, freelancer fees, interest or dividends, there is a second filing to make. This guide is for foreign founders and managers, and for payroll staff at foreign-invested companies. The rule in one line: pay 10% of the tax you withheld as local income tax (지방소득세) on Wetax, separately from Hometax, by the 10th of the following month.

Withholding tax and local income tax are two filings

Article 103-13(1) of the Local Tax Act (지방세법) says that when a withholding agent withholds income tax from a resident (거주자), it must at the same time collect 10% (100분의 10) of that income tax as individual local income tax (개인지방소득세). This is called special collection (특별징수), and the company that withholds the income tax is also the special collection agent.

The same applies when your company pays interest or dividends to a corporation and withholds corporate tax. Article 103-29 of the same Act requires you to collect 10% of the withheld corporate tax as corporate local income tax (법인지방소득세).

National and local taxes run on different systems. National taxes go through Hometax (홈택스), the National Tax Service website. Local taxes go through Wetax (위택스), the website for filing and paying local taxes. In Seoul, ETAX (이택스), the city's own tax website, also works. Filing the withholding tax return (원천징수이행상황신고서) on Hometax does not complete the local tax filing. To be safe, list two returns and two payment slips on your monthly closing checklist. For the income tax side of foreign staff payroll, see Foreign employees and the 19% flat tax rate.

Deadlines: the 10th of the next month

• Monthly payment: by the 10th of the month after the month in which the tax was collected (Article 103-13(2)).
• Workplaces approved for half-yearly payment of withholding tax (반기납부): by the 10th of the month after the last month of each half-year, that is, July 10 and January 10.
• Tax place for half-yearly payers: the tax place as of the last day of the last month of the half-year.
• Corporate local income tax collected on interest and dividends: by the 10th of the month after the month of collection (Article 103-29(3)).

The half-yearly option is covered in Half-yearly payment of withholding tax.

Which local government gets the tax

A company with only a head office has little to decide. If you have branches or remote work sites, the tax place (납세지), meaning the local government that receives the tax, depends on the type of income. The rule is in Article 89(3) of the Local Tax Act.

Wage income is the point most often missed. Even when the head office pays all salaries in one batch, the tax for employees who work at a branch goes to the branch's local government. By contrast, freelancer business income (withheld at 3.3%) or other income processed in bulk by the head office goes to the head office's local government, because that is the place of payment.

What to submit on Wetax

Article 100-5(1) of the Enforcement Decree of the Local Tax Act (지방세법 시행령) requires a payment slip (납부서) with a calculation sheet (계산서) and a detailed statement (명세서) attached.

• The statement may be left out for wage income, interest income, public pension income and business income paid by the National Health Insurance Service (Enforcement Decree, Article 100-5(2)).
• It cannot be left out when the local government asks for each person's records, for example to issue tax payment certificates.
• For business income and other income, attach the statement.

On Wetax you enter these form items on screen. First, check these figures against your national tax return:

1. Number of people for each income type.
2. Tax base for each income type, which is the national income tax amount.
3. That the 10% is calculated on the income tax after any reduction or exemption (the bracketed text in Article 103-13(1)).
4. Headcount split by branch.
5. Whether year-end settlement refunds are reflected.

When a year-end settlement refund is large

Year-end tax settlement (연말정산) is the annual recalculation of each employee's income tax on wages, and it can produce refunds. If the local income tax to be refunded is larger than the special collection tax you owe that month, you adjust it against payments in the following months (Enforcement Rule of the Local Tax Act (지방세법 시행규칙), Article 48-2(1)).

To get the money back without waiting, file a refund claim with the local government in charge of your special collection. Use Form No. 23 (별지 제23호서식) of the Enforcement Rule of the Framework Act on Local Taxes (지방세기본법 시행규칙), the refund claim for local income tax (지방소득세(특별징수분, 신고·고지분) 환급청구서). The basis is Article 48-2(2) of the Enforcement Rule of the Local Tax Act. For staff who joined during the year, see also Year-end tax settlement for mid-year hires.

Mistakes: overpaid, underpaid or late

• Overpaid: the excess is refunded by adjusting it against the next local income tax you pay (Enforcement Rule, Article 48(2)).
• Adjustment larger than that month's payment: keep adjusting against later months (Article 48(3)).
• No later tax to pay: the local government that received the overpayment refunds it directly (Article 48(3), item 1).
• Tax sent to the wrong local government, for example on pension income or on business income paid by the National Health Insurance Service: add or subtract the amount in the payment due by the 10th of the month after you find the error. No penalty applies to the extra payment (Local Tax Act, Article 103-13(3); Enforcement Decree, Article 100-5(3)).
• Underpaid or paid late: a late-payment penalty for special collection (특별징수 납부지연가산세) applies.

Article 56(1) of the Framework Act on Local Taxes (지방세기본법) sets the penalty:

• 3% of the unpaid or underpaid tax;
• plus the number of days from the day after the statutory due date to the payment date, multiplied by an interest rate set by Presidential Decree (대통령령);
• the two items above together are capped at 10% of the unpaid tax;
• the overall cap is 50% of the unpaid tax.

If the company did not collect the tax at all but the income earner has already filed and paid it, the company is charged only the penalty (Local Tax Act, Article 103-14).

Checklist

• Basis: Local Tax Act Articles 103-13 (individuals) and 103-29 (corporations).
• Amount: 10% of the income tax or corporate tax withheld.
• Deadline: the 10th of the next month; half-yearly payers July 10 and January 10.
• Tax place: the workplace for wage and retirement income; the place of payment for income processed in bulk.
• Filing: payment slip, calculation sheet and statement entered on Wetax, checked against the Hometax return.
• Overpaid: adjust in later payments, or claim a refund on Form No. 23.
• Late: 3% plus a daily amount, capped at 50%.