From Calculating Severance Pay to Taxes: Everything You Need to Know Before Receiving It

What is Severance Pay? Understanding the Basics

Severance pay is financial compensation that an employee receives from their employer upon retirement. For employees who have worked for one year or more, employers are required to pay severance, which is a legal obligation specified in the Labor Standards Act. The purpose of severance pay is to compensate workers for their long service and provide financial support for their life after retirement.

As of 2026, the severance pay system follows these basic principles. Severance is paid regardless of the reason for retirement—whether an employee voluntarily resigns, accepts recommended dismissal, reaches mandatory retirement age, or is terminated. A company's financial situation or number of job changes do not exempt them from the obligation to pay severance.

The Exact Formula for Calculating Severance Pay

Severance pay is calculated using the following formula:

Severance Pay = (Average Monthly Wage) × (Years of Service)

Here, the average monthly wage is the total salary (base pay, bonuses, allowances, etc.) received over the three months immediately preceding retirement, divided by 90 days. For example, if you earned a total of 12 million won over the past three months, your average monthly wage would be approximately 4 million won. Years of service refers to the period from your start date to retirement date, and you must have at least one year of service to receive severance pay.

Let's look at a practical calculation example. If your average monthly wage is 4 million won and your years of service is 5 years, your severance pay would be 4 million won × 5 years = 20 million won. However, if your years of service is less than one year, you receive no severance pay. If it's between one year and one year and six months, you receive 30 days' worth of regular wages.

Taxes and Insurance Premiums Deducted from Severance Pay

The actual amount you receive in severance pay is after taxes and various insurance premiums are deducted. The taxes applied to severance pay are as follows:

• Income Tax: 5% tax rate applied to the amount exceeding 20 million won (amounts up to 20 million won are tax-exempt)
• Local Income Tax: 10% of the calculated income tax (severance income of 20 million won or less is tax-exempt)
• Health Insurance Premium: Approximately 3.63% of severance pay (employee's share)
• Employment Insurance Premium: 0.8% of severance pay (employee's share)

For example, if your severance pay is 30 million won, the amount exceeding 20 million won (10 million won) is subject to 5% income tax = 500,000 won. Local income tax is 10% of 500,000 won = 50,000 won. Health insurance premium is approximately 1.09 million won, and employment insurance premium is approximately 240,000 won. Therefore, your actual payment would be approximately 28.12 million won.

Cases Where You Can Receive Severance Pay Early

In principle, severance pay can only be received at the time of retirement. However, there are specific situations where you can receive severance pay before actually retiring:

• Treatment of illness or injury: When an employee needs long-term treatment for illness or injury, or when the company's business site closes
• Natural disasters or large-scale accidents: When emergency funds are needed due to fire, floods, earthquakes, etc.
• Using a severance pay mutual aid association: Some companies allow partial withdrawal through a severance pay mutual aid association

When requesting early withdrawal, you should contact your company's HR department or personnel manager to proceed with the process, and you may need to provide documentation of legitimate reasons (medical certificates, disaster proof, etc.).

Checklist for Receiving Severance Pay

Once your retirement is confirmed, you must verify the following items:

• Verify employment period: Confirm through personnel records that your start date and retirement date are accurately recorded
• Verify average wage calculation: Request the past three months' pay stubs and confirm that the average wage calculation is correct
• Check for unpaid wages: Ensure that your current month's salary, vacation compensation, performance bonuses, etc. are not missed
• Tax deduction details: Review whether the severance income tax has been calculated correctly
• Confirm bank deposit: After receiving severance pay, verify that the actual deposit amount matches your expectations

If the calculation doesn't match or you have any questions, contact your company's HR department immediately. If a dispute arises after retirement, resolution becomes more complicated, so it's important to verify details carefully at the time of retirement.

How to Manage Severance Pay Wisely

How you manage your severance pay after receiving it is also an important decision. It is recommended to establish a long-term financial plan and manage it carefully:

• Secure emergency funds: Keep 30–50% of your severance pay as living expenses or emergency funds
• Invest cautiously: Consider stable products (fixed deposits, funds, etc.) rather than aggressive investments
• Take advantage of tax benefits: Use savings products that offer tax deductions such as severance income deductions
• Prepare funds for re-employment: If you're considering finding a new job or starting a business, secure sufficient funds

Also, be sure not to miss National Pension and Health Insurance premium payments after retirement. If you're unemployed without income, you can apply for insurance premium reductions, so it's a good idea to inquire with the relevant agencies (National Pension Service, Health Insurance Service) in advance.

This article is information analyzed and compiled by AI from various sources. Please verify more accurate details with relevant agencies or professionals.