Tax Basics: Earned Income and Investment Income

1.Before You Read This Lesson

This lesson first explains the general principles of how taxes are charged, then gives an overview of Korea's system as of 2026. It is not tax advice tailored to anyone's situation, and tax laws can change from year to year. Before filing or making any real decision, always check the guidance on the National Tax Service's Hometax site and other official materials. Other countries' systems differ, so if you live elsewhere, check your own country's rules.

The skeleton of a tax system is simple. You only need to grasp four things: what is taxed (taxable income), at what percentage (the tax rate), how much is knocked off (deductions and credits), and when it is paid (withholding and settlement). The percentage calculations from Math Lesson 2, and the habit of asking "what is the base?", apply directly here.

2.Basic Concepts: Taxable Income, Deductions, and Withholding

Gross income is all the money you earned in a year. But tax is charged not on all of it, rather on the amount left after subtracting the various deductions set by law. This "base amount on which tax is charged" is called taxable income. Two people with the same salary can owe different taxes if their deductions differ.

There are two kinds of relief. An income deduction reduces your taxable income, while a tax credit is subtracted directly from the tax once it has been calculated. For example, take the same 1,000,000 won: as an income deduction, it cuts your taxable income by 1,000,000 won, so your tax falls by "1,000,000 won × your tax rate"; as a tax credit, the tax itself falls by 1,000,000 won.

Payment also happens in two stages. Withholding means whoever pays you the income deducts the tax in advance and pays it on your behalf. Then, after the year ends, the tax actually owed is calculated precisely and compared with what was paid in advance, which is called settlement. If you paid too much, you get it back; if you paid too little, you pay the rest.

3.Progressive Tax Rates: Each Bracket Has Its Own Rate

In many countries, income tax is progressive: higher rates apply as income rises. The key point is that a higher rate applies only to the portion above that bracket's threshold, not to all of your income. Like climbing stairs, each bracket's slice is taxed at that bracket's rate.

In Korea (as of 2026, applying to income from 2023 onward), the basic comprehensive income tax rates are as shown in the table below. The progressive deduction is the amount that removes the extra tax charged on the lower brackets when you calculate "total taxable income × that bracket's rate" in one step, so the result is exactly the same as calculating bracket by bracket. On top of this, local income tax equal to 10% of the income tax is added separately. Rates can change, so check official National Tax Service guidance.

4.Marginal vs. Average Tax Rates: Clearing Up the "Moving Up a Bracket Costs You" Myth

The marginal tax rate is the rate charged on one more unit of income, that is, the rate of the top bracket you reach. The average tax rate is tax paid divided by income. Under a progressive tax, the marginal rate is always equal to or higher than the average rate. The person in the previous example had a marginal rate of 24% and an average rate of 14.4%.

You often hear that "if a raise pushes you into a higher bracket, you end up taking home less." Since the higher rate applies only to the portion above the threshold, this is wrong as far as income tax goes. Only part of the extra income goes to tax; tax never rises by more than the extra income. As long as the marginal rate is below 100%, your after-tax income rises too.

5.Earned Income in Korea: Withholding and Year-End Tax Settlement

In Korea (as of 2026), employees' earned income tax is withheld from their pay every month according to a simplified withholding table. Because this is an estimate, early the next year (usually with the February paycheck) the year's tax is finalized in the year-end tax settlement, and you get back what you overpaid or pay what you underpaid. Getting money back in the year-end settlement is not a windfall; it is recovering tax you paid too much of in advance.

Social insurance contributions such as the National Pension and National Health Insurance are also deducted from your pay. They are not taxes, but they reduce your take-home pay. As of 2026, the employee's share is 4.75% for the National Pension and 3.595% for health insurance. Amounts and rates can change, so check official guidance.

• Step 1: Total salary − earned income deduction = earned income amount
• Step 2: Earned income amount − income deductions (personal deductions, etc.) = taxable income
• Step 3: Taxable income × tax rate = calculated tax
• Step 4: Calculated tax − tax credits and reductions = final tax (with local income tax of 10% added separately)

6.Investment Income and Stock-Related Taxes in Korea

In Korea (as of 2026), financial income such as deposit interest and dividends is subject to 15.4% withholding (14% income tax + 1.4% local income tax) when you receive it. Just plug this rate into "after-tax interest = interest × (1 − tax rate)" from Lesson 2. However, if your combined interest and dividend income exceeds 20,000,000 won in a year, the excess is added to your other comprehensive income and taxed at the progressive rates. This is called comprehensive taxation of financial income. For example, if your financial income for the year is 25,000,000 won, the 5,000,000 won above the threshold is added in.

Stock-related taxes differ for domestic and overseas shares. For domestic listed shares, ordinary investors pay no capital gains tax on trading profits (major shareholders and others meeting certain criteria are taxed); instead, a securities transaction tax of 0.20% of the sale amount is charged when you sell (for KOSPI-listed shares, a 0.05% transaction tax + a 0.15% special tax for rural development; it was 0.15% in 2025). For overseas shares, gains and losses for the year are combined, a basic deduction of 2,500,000 won is subtracted, and 22% (including local income tax) is charged; you file this yourself in May of the following year. Taxation of virtual asset income has been postponed several times and is currently reported to be scheduled for 2027, but that may change.