Sole proprietor taxes in Korea: bookkeeping, partners and faithful filing

This guide is for sole proprietors (개인사업자) in Korea, including foreign residents. It covers bookkeeping, the tax calendar, partnerships, faithful filing (성실신고확인) and when a company may pay less tax. Figures are as of 2026.

Bookkeeping: what the Income Tax Act requires

A sole proprietorship has no legal personality of its own, so you are taxed personally under the Income Tax Act (소득세법). The article's main point is that a sole proprietor should plan around tax rules first. By default every business must keep double-entry books (Article 160). Smaller businesses may keep simple books (간편장부) instead and are called simple bookkeepers (간편장부대상자). Everyone else is a double-entry bookkeeper (복식부기의무자).

Double-entry bookkeepers must attach a balance sheet, an income statement and related schedules to the income tax return. Without them, the return counts as not filed (Article 70(4)).

If you keep no books, your income is estimated. With the simple expense rate (단순경비율), a fixed share of revenue counts as expenses. With the standard expense rate (기준경비율), you prove major costs such as purchases, rent and wages, and a rate covers the rest (Enforcement Decree, Article 143).

For the simple expense rate only, VAT-exempt freelance services (인적용역, VAT Enforcement Decree, Article 42(1)) in the personal services group use the ₩36,000,000 limit (Enforcement Decree, Article 143(4)). New businesses may keep simple books in their first year. Doctors, pharmacists, veterinarians and licensed professionals such as lawyers, accountants and tax accountants cannot use simple books or the simple expense rate (Enforcement Decree, Articles 143 and 208). Double-entry bookkeepers must register a business bank account (사업용계좌) within 6 months from the start of the first tax year of the duty (Act, Article 160-5). With high costs, real books usually help; with low costs, an estimate may come out lower.

Deductions and reductions to check

• Yellow Umbrella mutual aid (노란우산공제): payments are deductible up to ₩6,000,000 if business income is ₩40,000,000 or less, ₩5,000,000 up to ₩60,000,000, ₩4,000,000 up to ₩100,000,000 and ₩2,000,000 above that (Restriction of Special Taxation Act, 조세특례제한법, Article 86-3).
• Pension accounts, including an IRP: a tax credit of 12%, or 15% if comprehensive income is ₩45,000,000 or less, on up to ₩9,000,000 a year, of which pension savings count up to ₩6,000,000 (Income Tax Act, Article 59-3).
• Hiring: the employment increase credit (고용증대 세액공제, Article 29-7) covered increases up to the 2024 tax year. The integrated employment tax credit (통합고용세액공제, Article 29-8) now applies, set for tax years 2026~2028.
• The start-up SME tax reduction (창업중소기업 등에 대한 세액감면, Article 6) covers SMEs started by December 31, 2027. Its rate depends on age, location and start date. The special tax reduction for SMEs (Article 7) runs to tax years ending by December 31, 2028.
• Filing electronically by yourself earns a small e-filing credit (Article 104-8).

The yearly tax calendar

As a rule, individuals do not file VAT returns in April and October. The tax office bills half of the previous period's VAT and does not bill amounts under ₩500,000 (VAT Act, Article 48): see A VAT preliminary notice can sometimes be replaced by a preliminary return. The tax office bills the real estate holding tax; you may instead file it yourself in the same period.

Partnerships: income splitting and its limits

Personal income tax rises in steps: 6% up to ₩14,000,000, 15% up to ₩50,000,000, 24% up to ₩88,000,000, 35% up to ₩150,000,000, then 38%, 40%, 42% and 45% (Article 55). Splitting income lowers the rate. Taxable income of ₩100,000,000 for one person means ₩19,560,000 of income tax. Two partners with ₩50,000,000 each pay ₩6,240,000 each, ₩12,480,000 together, which is ₩7,080,000 less before local income tax and deductions.

• A joint business (공동사업장) computes its income as if it were one person, then divides it by the agreed profit-sharing ratio. Each partner files his or her own return (Article 43(1) and (2)).
• If a related person, such as a family member, is also a partner and the ratio is false or set mainly to cut tax, that person's share is taxed to the main partner (Article 43(3)).
• Write a partnership agreement (동업계약서): purpose, shares, profit split, roles, decisions, losses, extra capital, withdrawal and settlement.
• When you apply for business registration, list every partner on Annex 1 of Form No. 4 (별지 제4호서식 부표 1) of the Enforcement Rule of the VAT Act (Article 9).
• Agree who keeps the books and how the business bank account works. Exits cause most disputes, so set valuation and settlement rules in advance.

Faithful filing (성실신고확인)

If revenue reaches the threshold in the table above, a tax accountant, a CPA registered as a tax agent, a tax firm or an accounting firm must check your books and sign a faithful filing report (성실신고확인서) (Article 70-2; Enforcement Decree, Article 133). Revenue from selling business tangible assets is excluded. With several industries or places of business, revenue is converted: main-industry revenue + other revenue × (main threshold ÷ other threshold) (Enforcement Decree, Article 208(7)). The return is then due June 30 instead of May 31.

• Credit for the fee: 60% of the cost of the check, up to ₩1,200,000 (Restriction of Special Taxation Act, Article 126-6).
• Medical and education expense credits for spending up to the 2026 tax year (Article 122-3(1)).
• Monthly rent credit of 15%, or 17% if comprehensive income is ₩45,000,000 or less, for those with comprehensive income of ₩70,000,000 or less, on rent up to ₩10,000,000 a year, up to the 2026 tax year (Article 122-3(3)).
• Penalty if the report is not filed by June 30: the larger of 5% of income tax × (business income ÷ total income) or 0.02% of business revenue (Income Tax Act, Article 81-2). Not filing it is also a ground for a non-scheduled tax audit (Framework Act on National Taxes, Article 81-6(3)).

When a company may pay less

National tax on the same taxable income in 2026 (local income tax adds 10% of each figure):

Corporate tax is 10% up to ₩200,000,000 and 20% up to ₩20,000,000,000 (Corporate Tax Act, Article 55), so 11% and 22% with local income tax. The 9% and 19% rates applied to 2023~2025. Small companies that mainly earn rent and meet other conditions pay 20% from the first won.

The table leaves out tax on the salary or dividends you take out, so the real gap is smaller. A company can pay its executives retirement pay, deductible up to the amount in the articles of incorporation or a set formula (Enforcement Decree of the Corporate Tax Act, Article 44(4)). Pay to a controlling shareholder or a related person above what others in the same position get, without good reason, is not deductible (Article 43(3)). A company also needs an annual shareholders' meeting (Commercial Act, Article 365), and you cannot use its money freely. If you were a faithful filing business and converted by in-kind contribution or business transfer, the company must file faithful filing reports for 3 years (Corporate Tax Act, Article 60-2).

Checklist

• Find your bookkeeping group from last year's revenue.
• Register a business bank account if you are a double-entry bookkeeper.
• Put the calendar dates in your diary, including November 30.
• Sign a partnership agreement and register every partner.
• Check this year's revenue against the faithful filing threshold before May.
• Compare tax as an individual and as a company before you convert.