Korean Severance Pay 2026: Calculation and Retirement Tax Explained

Korean severance pay isn't just "one month's salary per year of service." The legal formula uses average wages, and the payout is subject to retirement income tax — which behaves very differently from ordinary income tax. Here's the 2026 breakdown with worked examples.

1. The Legal Formula

The Labor Standards Act prescribes:

Severance = Daily average wage × 30 × (days of service / 365)

"Daily average wage" is defined as total wages paid over the last 3 months ÷ calendar days in that period. If bonuses or accrued-leave payouts land in those three months, average wage — and therefore severance — rises sharply.

Example: KRW 4M/month salary, 5 years 2 months tenure

• 3-month total: 4M × 3 = KRW 12M (no bonuses assumed)
• Days in period: ~91 → Daily avg ≈ KRW 131,868
• Severance ≈ 131,868 × 30 × (1,885/365) ≈ KRW 20.43M

2. Retirement Income Tax: Tenure Deduction is Key

A lump-sum payout could otherwise trigger brutal progressive tax. Korea applies two sequential deductions:

1. Tenure deduction
   • ≤5 years: KRW 1M × years
   • 5–10 years: 5M + 2M × (years − 5)
   • 10–20 years: 15M + 2.5M × (years − 10)
   • >20 years: 40M + 3M × (years − 20)
2. Annualized deduction — the remainder is annualized (×12) and reduced again by bracket percentages. Longer tenure → much lower effective rate.

In the example above (20.43M at 5.16 years), tenure deduction alone strips out ~5.3M. Effective tax ends up around KRW 400,000 — roughly a 2% effective rate.

3. Roll Into IRP to Defer Tax

Lump-sum payouts before age 55 trigger retirement tax immediately. Rolling into an IRP (Individual Retirement Pension) account defers the tax until withdrawal — and withdrawing as a pension applies a 3.3–5.5% pension income tax instead, typically 30–40% less than lump-sum tax.

Caveat: early withdrawal from IRP before 55 triggers a 16.5% other-income tax.

4. Three Commonly Missed Points

• Under 1 year = no statutory severance. Company policy may still pay it, but the law only kicks in after 12 months of service.
• DC-type enrollees use a different formula. In defined-contribution pensions, your severance equals monthly employer contributions plus investment returns.
• "All-inclusive salary" clauses don't override severance law when they disadvantage the employee.

5. Run the Numbers

• Severance Calculator
• Salary Calculator
• Compound Interest Calculator