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. A regular bonus that qualifies as wages is generally allocated using 3/12 of the prior 12 months' bonus rather than added in full in its payment month. Accrued-leave pay depends on when the right arose and the period it covers. If daily average wage falls below daily ordinary wage, the ordinary-wage floor applies.

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

If a KRW 3M annual regular bonus qualifies as wages, the usual 3/12 allocation adds KRW 750,000 to the three-month wage total. Under the simplified assumptions above, severance rises by about KRW 1.28M. The entire bonus is not automatically counted merely because its payment date falls in the last three months; one-off performance awards require a fact-specific wage classification.

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 as (retirement income − tenure deduction) × 12 ÷ tax service years, then reduced by bracket amounts. The resulting tax is multiplied back by tax service years ÷ 12.

The 1,885 service days above equal about 5.16 years for the severance formula, but a partial year is rounded up for retirement-income tax, producing 6 tax service years. Assuming KRW 20.43M of severance, the tenure deduction is KRW 7M and estimated income tax plus local income tax is aboutKRW 249,000 (roughly 1.22%). Actual withholding can vary with the final retirement-income amount and the payer's won-level processing.

3. Roll Into IRP to Defer Tax

When a benefit is paid directly as a lump sum under a statutory exception instead of being transferred to an IRP, retirement-income tax is withheld. Retirement benefits generally transfer to an IRP (Individual Retirement Pension), which defers that tax until withdrawal. Confirm whether an exception—such as retirement at age 55 or older—and the required payment route apply with the payer. Withdrawing as a qualifying pension applies 70% of the deferred retirement-income tax for actual pension years 1–10, 60% for years 11–20, and 50% after year 20 for payments from 2026. The age-based 3.3–5.5% pension-income rates do not apply uniformly to the transferred severance principal.

For a non-pension withdrawal, the deferred severance portion is taxed as retirement income. The 16.5% other-income rate (including local tax) generally concerns tax-credited personal contributions and investment earnings, not the entire IRP balance. Confirm withdrawal eligibility and source-by-source tax treatment with the account provider.

4. Three Commonly Missed Points

• Under one year of qualifying continuous service means no statutory benefit. Even after one year, check exclusions such as periods averaging fewer than 15 scheduled hours per week over four weeks.
• DC-type enrollees use a different formula. Their benefit depends on actual employer contributions, investment results, and fees. The average-wage formula applies directly to the statutory severance system; a DB plan must also satisfy its rules and the statutory minimum benefit level.
• "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