Why the Year-End Settlement Produces a Refund for Some and a Bill for Others

Reconciling Tax Paid in Advance With Tax Actually Due

Employers withhold income tax each time salary is paid and remit it to 국세청 (the National Tax Service). They use the simplified withholding tax table, which is calculated in advance from salary, the number of dependents, and similar factors. The income tax line on a payslip is this amount.

At the point salary is paid, though, there is no way to know how much that person will spend on medical care over the year, how much will go into a pension account, or how much a credit card will be used. So the tax withheld each month is closer to an advance payment at that point than a final figure.

Once the year ends, the tax is calculated again with actual salary and the various deduction items applied. The figure that emerges is determined tax, and the sum of what the employer withheld in advance through the year is tax already paid.

A refund, then, is not a separate payment from the state but what remains of the tax paid in advance through the year after the tax actually due is taken out.

The Order in Which Determined Tax Is Calculated

Knowing where each deduction lands makes it easier to see why two people on the same salary end up differently. The calculation runs in a set order.

Income deductions reduce taxable income before the rate is applied; tax credits come off the calculated tax directly. The difference between the two methods is set out separately in income deductions and tax credits.

On the same salary, differences in the number of dependents, medical expenses, card spending, and pension account contributions produce different deduction amounts. So the same total salary does not produce the same determined tax.

An income deduction of KRW 1 million does not come back as KRW 1 million. It reduces taxable income by KRW 1 million, so the tax actually removed depends on the rate applied. A tax credit, by contrast, subtracts a set amount from the calculated tax directly.

Why Refunds and Further Payments Differ

Take someone on total salary of KRW 40 million with KRW 1.5 million of income tax paid in advance through the year. The refund varies with the taxable income that emerges after deductions.

The table is a simple illustration on calculated tax with no tax credits applied. In an actual year-end settlement, credits for pension accounts, medical expenses, and rent may come off further.

Lower taxable income means lower calculated tax, and where the tax already paid is the same, the refund grows accordingly. The deduction amount and the tax actually removed are not the same figure, though. It depends on which rate band the taxable income falls out of.

A further payment works on the same principle. Where the tax paid in advance through the year falls short of the final determined tax, the shortfall is paid.

This can arise in a year with a job change. Each employer withheld tax against its own salary, but combining the pay from both can produce a different final tax.

So after a job change, the withholding tax receipt for employment income from the previous employer is submitted to the new one so that both salaries are settled together.

A change in the number of dependents that was not passed to the employer at the time can also open a gap between the tax paid in advance and the final figure.

Where the employer allows it, the withholding proportion under the simplified table can be set at 80%, 100%, or 120%. Choosing 80% withholds less each month and raises take-home pay, while shrinking the year-end refund or raising the chance of a further payment. 120% works the other way.

Whichever proportion is chosen, though, the total tax to be borne for the year does not change. What changes is how much is paid in advance.

A large refund does not by itself mean the tax was managed better. On the same determined tax, the more paid in advance through the year, the larger the refund.

Raising the proportion to 120% to enlarge the refund gains nothing. The total tax for the year is the same either way.

When Further Deductions Change Nothing

One thing is worth checking before filling in more deduction items ahead of the settlement.

Where determined tax is already zero, further tax credits do not enlarge the refund. There is no tax left to reduce.

This can apply where income is modest, or where several deductions have already brought calculated tax and determined tax down. In that case, extra money into a pension account may not draw the full tax credit for that year.

A pension account remains useful for building retirement funds, but where the aim of an additional contribution is the year-end refund alone, checking your own determined tax first is worthwhile.

The card spending deduction does not grow without limit either. Spending has to exceed a set proportion of total salary before the deduction begins, and once the cap is filled, further spending does not enter the deduction.

As the year end approaches, checking whether this year's eligible spending has cleared the threshold and how much cap remains beats simply spending more on cards. The detailed calculation is in the card spending deduction.

For pension accounts, amounts paid in by December 31 enter that year's tax credit. Paid in January, they fall into the following year.

The dependent allowance is easy to miss. Parents living elsewhere can still draw the basic allowance where the age and income requirements are met. The basic allowance is an income deduction of KRW 1.5 million per person.

Siblings cannot each claim the same parent, though. Deciding in advance which family member will apply the deduction helps reduce corrective filings.

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