[Income Tax in Korea] Understanding the Standard & Simplified Expense Rate System

Understanding the Standard & Simplified Expense Rate System

we will delve into the Standard & Simplified Expense Rate System for income tax in Korea. Whether you're a business operator or a taxpayer subject to this system, understanding the principles and calculations can significantly impact your tax return.

 

Standard & Simplified Expense Rate System

The Standard Expense Rate Calculation

All business operators are required to file their tax returns based on bookkeeping records. However, for self-employed taxpayers who do not keep books, determining the exact income amount can be challenging. In such cases, the taxable income is calculated using a presumed expense rate—either the standard or simplified expense rate—applied to the previous year's gross revenue.

For taxpayers subject to the standard expense rate, primary expenses (purchase expense, rent expenses, wage) supported by documentary evidence are recognized as necessary expenses. Other expenses are calculated using the government-designated standard expense rate. The income amount is then obtained by deducting primary expenses and the product of gross revenue and the standard expense rate from the gross revenue.

For tax returns filed from 2011 onwards, a standard expense rate of 50% applies to taxpayers using double-entry bookkeeping.

Income amount = Gross revenue ‒ Primary expenses ‒ (Gross revenue×Standard expense rate

However, to prevent a drastic increase in tax burden, these taxpayers can choose the lesser of income based on the standard expense rate and income computed by multiplying income based on the simplified expense rate with a multiplying factor.

Income amount (based on standard expense rate) ≤ Gross revenue ‒ {(Gross revenue × Simplified expense rate)}× Multiplying factor (2.8 or 3.4)

Calculation of Income using the Simplified Expense Rate

For taxpayers subject to the simplified expense rate, income is computed by deducting necessary expenses from the revenue. Necessary expenses are calculated by multiplying gross revenue with the simplified expense rate.

Income amount = MIN[Gross revenue ‒ (Gross revenue × Simplified expense rate), Income amount based on standard expense rate]

Application of the Standard & Simplified Expense Rates

Taxpayers subject to the standard expense rate:

1. Taxpayers who do not keep books and are not subject to the application of the simplified expense rate.

2. Taxpayers who do not keep books and whose sum of gross revenue of the preceding tax year (2021) is equal to or more than the specified amount.

3. Newly commenced businesses in 2022 whose gross revenue in the taxable period exceeds the minimum revenue threshold.

Taxpayers subject to the simplified expense rate:

1. Businesses that were newly commenced in the same taxable year whose minimum revenue falls short of the specified threshold.

2. Businesses that do not file income based on bookkeeping records whose amount of revenue attributable to the preceding taxable year (2021) falls short of the specified threshold.

 

Applying the Standard & Simplified Expense Rates - What to Know

• Primary expenses are expenses that should be disclosed by all businesses including those that do not keep books. They include purchase expense, rent expense and wages, which can be easily verified by documents.
• Primary expenses need to be verified by documents.
  • 1) Purchase expenses and rent expenses need to be verified by a tax invoice, invoice, or credit card sales slip (including cash receipt). Simplified tax invoices or regular purchase receipts need to be verified by a “statement of primary expenses“.
  • 2) Wage expenses need to be verified by a receipt for wage & salary income tax withholding or statement of wage & salary income payment, which has to be either submitted to the district tax office or kept by the taxpayer.
• Application of the simplified expense rate by a taxpayer subject to the standard expense rate has the effect of under-reporting his/her income and tax payable. Therefore, penalty tax for unfaithful filing and late payment will be imposed for the under-reported portion.
• When a taxpayer subject to the simplified expense rate with not less than 48 million won of gross revenue in the preceding tax year (2021) files his/her return by estimation, penalty tax equivalent to 20% of the calculated tax amount will apply for non-bookkeeping.

Small-sized businesses exempt from the penalty tax for non-bookkeeping:

• Businesses that were commenced in the same taxable year
• Businesses with revenue of less than 48 million won in the immediately preceding year
• Insurance solicitors, door-to-door salespersons, and beverage delivery persons with only business income declared through year-end tax settlement who are exempt from filing final return of tax base 

Where the income amount is filed by estimation by a person liable to double-entry bookkeeping, the largest of the following amount shall be applied as the penalty for non-filing.

• The largest of (①, ②, ③)
  • ① Unfiled tax amount to be paid x 20% (40% for fraudulent acts; 60% for overseas fraudulent acts)
  • ② Total revenue x 7/10,000 (14/10,000 for fraudulent acts)
  • ③ Calculated tax amount×[Omitted (under-recorded) income/ Global income]×20%

Applying the simplified expense rate - What to know 

When applying the simplified expense rate, the eligible taxpayer may declare the lesser of the following:

• 1) Income computed using the simplified expense rate
• 2) Income computed using the standard expense rate

A taxpayer eligible for simplified expense rate application shall compute his/her rate as follows when he/she is a physically disabled person as prescribed by Article 107 (1) of the Enforcement Decree of Individual Income Tax Act (the disability should be verified by a certificate of disability and the business concerned should be managed directly by the said disabled person).

Simplified expense rate for the disabled = Simplified expense rate + (100% ‒ Simplified expense rate) x 20% * In this case, the numbers are cut off to two decimal places.

In case of the standard expense rate, exceptions do not apply to the disabled.

Exceptions to Personal Service Income Earners' Simplified Expense Rate Application

• When applying the simplified expense rate to personal service income earners (business code: 94****) under the notification of the National Tax Service, the basic rate is applied to revenue up to 40 million won, and the excess rate is applied to the amount exceeding 40 million won.
• The income structure of personal service income earners is similar to that of salary income earners as they do not need to hire employees or establish a place of business, but salary income earners bear a heavier tax burden. To address such unfair taxation, the excess rate system was introduced.

Calculation of Income – Example

• Income amount of a salesperson whose annual revenue is 45,000,000 won: 45,000,000 won-{(40,000,000 won×75.0%)＋(5,000,000 won×65.0%)}=11,750,000 won

Annualization of revenue applied to businesses that operated for less than a year due to business opening/closure was abolished in 2010

Conclusion

Understanding the Standard & Simplified Expense Rate System is crucial for taxpayers and businesses operating in Korea. By accurately computing your income and expenses, you can fulfill your tax obligations efficiently and avoid unnecessary penalties.