Preparing for Korea’s 2026 Year-End Tax Settlement

Before the year-end tax settlement for 2026 income, payroll teams should first check for omitted taxable employment income, confirm that each tax-exempt pay item meets the relevant conditions, and reconcile payroll records with tax reporting data. In particular, check that the expanded childcare allowance exemption of KRW 200,000 per child per month has been reflected in the payroll system. An effective approach is to resolve the main issues in year-to-date records by November, then incorporate additional payments and changes in December before closing the annual records.

Waiting until the National Tax Service’s simplified year-end tax settlement service opens can leave the team correcting employer-paid income at the same time as reviewing employees’ deduction documents. This guide focuses on the income records employers need to finalize and the criteria for tax-exempt treatment, ahead of employees’ individual tax-saving choices. The settlement for the 2026 tax year covers income attributable to 2026 and takes place in 2027. Always distinguish the year in which a reference was published from the tax year it covers.

Look beyond the payroll register to establish the full income total

The National Tax Service (NTS) defines gross wage and salary income as annual employment income excluding tax-exempt income. It is not the same as take-home pay deposited into an employee’s bank account or the total payments shown in the payroll register. An omitted taxable allowance or an incorrectly applied exemption can affect this total, the deduction limits calculated from it, and the final tax liability (Source: NTS).

Common omissions include amounts paid outside the payroll system or recorded only as accounting expenses. Examples include course fees for personal development unrelated to the employee’s work, travel payments above the limits set by the relevant rules, welfare points used under an employee flexible benefits program, and gifts or gift certificates provided for birthdays, holidays, or long service. Imputed interest benefits from interest-free or below-market employee or executive loans, including housing loans, may also constitute employment income, subject to exceptions such as certain SME housing loans to employees. Amounts attributed as bonuses for private use of company passenger vehicles are also employment income.

Booking a payment as a welfare or business expense does not, by itself, make it tax-exempt. Work with Finance to compare payments outside regular payroll for each employee, covering January through the latest closed month, and identify any omissions.

Compare the payroll register, accounting payment records, withholding tax filings, and the data prepared for year-end settlement. Investigate differences by employee, pay item, and month. Classify retroactive pay and performance bonuses whose payment dates differ from their income attribution periods under the applicable income recognition rules. Keep income from previous employers separate from current-employer payroll and check for duplication in the combined data. Assign an owner and a resolution deadline to every discrepancy, rather than leaving it marked “under review.”

Assess tax exemptions against payment conditions

The checklist below covers items frequently reviewed in routine payroll administration. Mark each item as “Meets requirements,” “Further documentation required,” “Review for taxable treatment,” or “Not applicable.” Record the applicable months and the location of the supporting evidence. Staying within the monetary limit alone does not complete the check (Sources: NTS; Income Tax Act, Article 12).

For employee tuition assistance, the repayment condition applies where the education or training lasts six months or longer. The agreement must require repayment if, after completing the program, the employee does not remain in service for longer than the duration of the education or training. Labeling a payment “education expenses” does not make all course fees or textbook costs tax-exempt. Check the recipient, the institution, and the nature of the expense separately.

The treatment of a personal vehicle allowance paid alongside travel expenses also depends on the circumstances. Distinguish duplicate reimbursement of local business travel costs from reimbursement of actual expenses for out-of-town business travel. Even an allowance within the limit requires further review if the vehicle ownership or lease conditions and business-use requirements are not met. Where meal provision or vehicle use changes during the year, review the months before and after the change separately (Source: NTS).

Reconcile 2026 childcare allowances for each child

For payments made on or after January 1, 2026, the monthly childcare allowance exemption increased from KRW 200,000 per employee to KRW 200,000 per child. Eligibility is assessed by the child’s age at the start of the tax period. The Income Tax Act defines the relevant age period as up to and including the day the child turns six. Check that your system’s eligibility filters reflect the statutory rule, rather than simply selecting a generic age band. Also make sure children born during the year are added to the records and the start of allowance payments is captured (Sources: Income Tax Act, Article 12(3), childcare allowance provision; Ministry of Economy and Finance, 2025).

For example, if an employer pays KRW 200,000 per month for each of two eligible children, the full KRW 400,000 can be tax-exempt where the conditions are met. Having two children does not, however, allow an employee to exclude amounts that were never paid. The limit defines the tax-exempt portion of childcare-related pay provided by the employer; it does not require the employer to pay that amount.

Payroll teams should compare the number of eligible children, the payment for each child, the exempt amount, and any taxable excess for every month. If an outdated setting has treated only KRW 200,000 of a KRW 400,000 monthly payment for two children as exempt, review payments made from January 1, 2026. Confirm the applicable periods and payment basis before determining the corrections needed. Conversely, if a KRW 300,000 monthly payment for one child has been treated as entirely exempt, separate out the excess. Updating the system setting is not enough: recheck the cumulative records and the amounts flowing into the settlement.

Childcare allowances and childbirth support payments appear alongside each other in the same statutory provision, but their conditions differ. It is therefore advisable to use separate pay codes. Qualifying childbirth support payments received on up to two occasions within two years of the child’s birth are exempt without a monetary cap; payments from a related party who is a relative are excluded. Separate the items to avoid applying the KRW 200,000 monthly limit to childbirth support or treating every birth-related payment as exempt without limit (Source: Income Tax Act, Article 12(3), childbirth support and childcare allowance provisions).

Resolve major issues in November and close out changes in December

The schedule below is a recommended internal timetable, not a set of statutory filing deadlines. Completing the first validation of year-to-date records in November allows time to obtain missing evidence and correct system settings. November checks cannot finalize the entire year’s income, because December payroll, bonuses, and payments confirmed later still need to be included.

Completion should be judged by whether unexplained differences remain, rather than the number of boxes checked. For items that meet the requirements, retain the supporting basis and the reviewer’s name. For corrected items, confirm that the change is reflected consistently in the payroll register, withholding tax receipts, and filing data.

When an error is identified, assess whether an amended withholding tax return or a correction to an already-submitted simplified statement of employment income payments is needed, taking account of the cause and timing. If tax was underpaid by the statutory payment deadline, late-payment penalties for withholding tax may apply. Finding an error during a preparatory review does not, by itself, trigger a penalty (Source: Framework Act on National Taxes, Article 47-5).

Coordinate expert review and employee communications

If the internal team cannot complete the review alone, build external expert review into the same timetable. HCG Payroll Outsourcing is managed by HR specialists and supports year-end tax settlement from preparing employee guidance and collecting and validating income and deduction data through to tax calculations and filing-data checks. Tax specialists review annual legislative changes. Even without integration with the existing payroll system, companies can prepare the required information using standardized input templates. Final filings are made in the client company’s name. HCG processes payroll and year-end tax settlement using its own proven HR solutions, and its payroll outsourcing service has a 98.9% contract renewal rate.

Companies receiving frequent repeat questions should also prepare their employee support process alongside the tax review. FAQs and AI chatbots can explain submission methods, schedules, and process steps, while questions about the eligibility of specific supporting documents or exceptional cases are referred to specialist advisers. HCG provides support through telephone, email, AI chatbots, and other channels according to the client’s environment.

By November, payroll teams should have three concrete outputs: a complete list of taxable employment income, an exemption checklist linked to supporting evidence, and an exception log with resolution deadlines. Updating these through the December payments reduces the need to reconstruct employer income records in the new year, leaving more time to review each employee’s deduction documents.

To bring expert validation into your year-end tax settlement preparations, speak with the HCG Payroll Outsourcing team.