Reporting Your Taxes
So your business is growing, you are getting sales, and you are loving the busyness of building your business, but what about taxes? Yup, taxes seem like are a scary thing, but if you understand them a bit and hire someone to help you with them, which isn’t as expensive as you think, then taxes can actually be used to benefit you and your business. Oh, that reminds me, if you haven’t done so already, make sure to download our 9 Tax / Legal Tips for Entrepreneurs in Korea by clicking here. It is 100% FREE and the tips will definitely benefit you as an entrepreneur in Korea. There are some things shared on there that are not shared in the crash course, so it will definitely be worth it to download it.
*The above is an image of an Electronic Tax Receipt for a sale (매입 전자세금계산서), which is an important document when it comes time to report the VAT and Income Taxes for your business.
Maybe the only reason you are afraid of starting your business in Korea is because you don’t know anything about what taxes you’ll have to pay or that you’ll have to pay a large amount of taxes. Maybe you imagine yourself forgetting to pay taxes on something and end up getting your whole family kicked out of Korea! And unless you are cheating people out of money or illegally making large sums of money, then that will not be the case. From my own experience, the National Tax Service of Korea is very lenient to first year business owners. I actually did not report my taxes for the first year of one of my businesses.
I started a business consultancy in 2012 when I had no business experience at all! Yup, that was me, but anyways, I didn’t make any sales that year and didn’t report any taxes. So some guy called me from the National Tax Service. And I was a little worried because you know, I thought taxes were scary. In the end, I just told him that I didn’t make any money so I didn’t report the taxes. And the guy was like, okay, I will do it for you this time, but you have to report something even if you don’t make any sales next time. He told me that I could go into the Hometax website at www.hometax.go.kr and just put zero for sales. And then he just hung up and that was that.
*The above is an image of an email you will receive from the National Tax Service that tells you that you can download a tax receipt that was issued by a business you bought something from. The tax receipt is shown in the very first image of this page.
To be honest, not knowing about taxes and the laws is what really scared me before starting my first business in Korea. But after I started my first few businesses, I realized something very interesting about taxes and laws in Korea. Even though I didn’t know most of the business laws and knew close to nothing about taxes, nothing bad happened to me. And it felt like nobody really cared if I was even following the laws or not, as long as I wasn’t bothering the people around me and the government workers responsible for checking up on small businesses.
From my experience, the government is very lenient to small business owners in Korea and don’t really bother them if the business is not causing any trouble. As the saying goes, the government has bigger fish to fry and could pretty much care less about the small businesses. And yes, a lot of small businesses in Korea have complained about the lack of support they get from the government, but at the same time it also gives small businesses a lot more slack when it comes to not knowing what business laws and tax rules they are supposed to abide by.
I want to share some information about taxes so you are less afraid. In the end, you will never know all of the laws and tax policies, I mean, how many lawyers and accountants know every single law or tax policy? My guess is that there isn’t a lot. So stop making excuses and take some action, so that you are one step closer to making your dream lifestyle a reality.
Business Types That Pay Taxes in Korea
In the end, there are two types of taxes your business can pay; income tax and value added tax (VAT). Every business is required to pay income taxes, but not all have to pay VAT taxes. In general, if your business charges VAT on the services or products it sells, then you will have to report VAT as well as income taxes.
Income Taxes (소득세)
Income is the money you make through your job or from your business. No matter what kind of business you have or what kind of job you work, you will pay income taxes once a year. In Korea, you have to report your income taxes in May. If you work a job, then your HR department will most likely take care of it, but if you own a small business, you will have to do it. You will either have to input the numbers into the “hometax” website or hire an accountant to do it for you. For income taxes, just keep a record of all of the sales and expenses you have. If you want to be careful, keep all of your receipt stubs. But in the end, the accountants only really need to see a statement of your payment activity, which can be easily seen in your monthly credit card or bank account statement.
*The above image is a screenshot of the HomeTax website. If your Korean is good enough and you like working with numbers, then you may be able to report your own taxes for your business.
Tax Brackets for Income Taxes
So the most important question you need to ask yourself about taxes is, how much of the money I make goes to the government? Well, it depends on what kind of company you are the owner of and how much profit your business earns. And we calculate profit as the revenue (amount of money your business makes) minus your business expenses (amount of money it costs to run your business). So if for one year, you made 100 million won from your business and your business expenses were equal to 90 million won, then you would be taxed on 10 million won for the year. But most importantly, how much of that 10 million won goes to the government? Well, let’s take a look at the charts below:
It is important to note that your business income is taxed at different rates for specific amounts. So let’s take some time to explain this. Let’s say you are a 개인 사업자 (Sole Proprietorship) and your business makes a profit of 100,000,000won for the year. You would not owe 35% of 100,000,000won in taxes, which would be 35,000,000won. Instead, you would owe 20,100,000won.
Let’s do the math for a 개인 사업자 (Sole Proprietorship) that makes 100,000,000won in profit for the year!
The chart above shows that a 개인 사업자 (Sole Proprietorship) making 100,000,000won in profit would owe 20,100,000won in taxes. Now, you may think that the amount is a lot, and it is if you don’t have any tax deductibles. But businesses have a bunch of tax deductions they qualify for and I share a little bit about them further down in this post. The same concept applies for a 법인 사업 (Corporate Business), but of course the tax percentages are different. And maybe at this point you are thinking of creating a corporate business in Korea. Well, it might be the better decision for you, but it would be best to speak to an accountant and/or a lawyer before you decide. However, if you are going to start a small business that will generate less than 400 million won a year in sales, then it is safe to say that you’ll most likely be applying to become a 개인 사업자 (Sole Proprietor).
Value Added Taxes (VAT) 부가가치세
Depending on the type of business you register, you may or may not have to pay VAT (부가가치세). If you didn’t know, when you go to the convenience store to buy a chocolate bar, you pay 10% VAT. If your business sells items that you pay VAT on, then you are supposed to charge your customers VAT on them. Some businesses decide not to charge VAT on certain items so that they can provide discounts, but you technically aren’t supposed to be doing that since the government decides what we pay VAT on.
*The above is an image of a receipt I received for eating 돈까스 at a restaurant in Seoul, South Korea. And the 16,000won cost was for two dishes priced at 8,000won each. But you can see circled in red the amount of VAT that was charged for the two dishes, which was 1,454 won.
If your business has to report VAT, then you should keep the following months in mind:
1. VAT Pre-Payment 1 – April
2. Income Tax – May
3. VAT Payment (or Return) 1 – July
4. VAT Pre-Payment 2 – October
5. VAT Payment (or Return) 2 – January
The pre-payments are not the actual VAT payment, but are estimated costs that are based on the previous year’s taxes so that you don’t pay too much when it comes time for the real VAT payment. Okay, that was a little confusing, so let me explain again. There are two VAT payments, one in July and one in January. But instead of paying your full taxes in July for your first payment, you make a pre-payment in April. And this is so that you don’t pay too much in taxes in July. And the same goes for January VAT payment. So even if the government over estimates the amount of a pre-payment by a large amount, you will get the difference returned to you and not have to make a payment.
Tip: When you make big purchases and are given a quote, like if you hire an interior designer and they quote you 20 Million won to complete all of the interior design work for your office space, then the price they quote you will most likely not have VAT (부가가치세) calculated into the cost. When you buy small things like a cake or a chocolate bar, the VAT will automatically be calculated in the total cost right from the start, but for large items like air conditioners and other things, most of the time the seller will tell you at the very end “부가세 별도 입니다”, which means VAT is not included. So if you pay the VAT on the 20 million won cost, your actual total cost will be 22 million won. Depending on the situation, it may or may not be worth it to pay for the VAT, so talk to a professional to get some advice. And don’t be like me when I first stared my English Gyosoopso business and say thank you when someone tells you “부가세 별도 입니다” because it becomes very obvious that you had no idea what the person had said.
Note: Value Added Tax (VAT) translates into 부가가치세 in Korean. But most people just use the term 부가세, which is just a shortened form to refer to VAT in Korea.
Tax Deductions (절세)
Again, I am not an accountant or a lawyer, but there are more things than you realize that can be counted as a tax deduction. If you are supporting family members that are unemployed, are paying pension (연금), or make donations (기부금) to charity, you may be entitled to some tax deductions.
One of the ways I saved on my income tax bill was by paying into a tax deductible savings account, which also yielded me some interest! Yup, if you didn’t know, there are special tax savings accounts that can help you when it comes to taxes. For example, I paid about 3 Million won year into a savings account, which allowed me to deduct the exact same money from my income taxes. In the end, I cashed out of that savings account after just 3 years of having the savings account when running my English Gyosoopso business and I ended up with more money than I put in! It didn’t build up that much more than I put in, but it was a great investment because it allowed me to deduct roughly 3 million won annually from my income tax bill, and I got back all of the money I put into the savings account and more!
*The above image is of the document I received from the organization I had the tax deductible savings account with. If you look at the bottom right of the image, you’ll see that the amount is 9,264,357 won, which is the amount I received when I closed my English gyosoopso business in 2017, which is 264,357 won more than I put in to the savings account.
There are other expenses that can be considered a tax deductible. Here are some that I know of:
-복리후생비 (employee benefits)
-인건비 (labour costs)
-And some others
It is extremely important to take what is stated on this page (and this whole website) as a guideline since I am not certified in anyway to give legal advice. I am just sharing from what I have learned from my experiences living as an entrepreneur in Korea who started some businesses and successfully sold one of them.
Now that you have some information about taxes and are finishing the crash course, what do you plan on doing? I will tell you this, this crash course has provided you with more information than I had when I started all of my businesses. So if you still do not take action to start your business in the next while, then a lack of information is not the reason you are not starting the business. Honestly, it’s most likely due to fear. And guess what, I was scared before I started all of my businesses, but I still took action, and so can you! And you know what, it’s okay to be scared, but it’s not okay to let that fear stop you from trying. If you try and fail, then you can learn from that failure and adjust. Just minimize the risk as much as you can and get started!