Starting next year, the tax withheld upfront from the pay of workers providing personal services, such as delivery riders and substitute drivers, will fall to 2.2% from the current 3.3%. Changing the current structure, under which large sums are withheld and later refunded, is expected to increase disposable income immediately and reduce the burden of filing for refunds.
The National Tax Service (NTS) held a meeting on the 1st at the National Assembly Members' Office Building in Yeouido, Seoul, with groups representing personal service workers, including the National Delivery Riders Association, the Korea Substitute Drivers Association, the caddy branch of the Korean Women's Trade Union and the Korea Television and Radio Writers Association, to explain the plan to lower the withholding tax rate. Lawmakers from both the ruling and opposition parties on the National Assembly's Finance and Economy Committee attended.
The tax reform package the government announced in August includes lowering the withholding tax rate on personal service business income to 2% from 3%. If the amendment clears the National Assembly, the tax withheld at the time pay is disbursed will drop to 2.2% from 3.3%, including local income tax.
Currently, personal service workers pay 3.3% of their gross income as tax upfront when they receive their pay. If the prepaid amount exceeds the actual tax owed after necessary expenses and various deductions are applied at the time of the comprehensive income tax filing, they receive the difference back.
The problem is that 3.3% of total income is withheld upfront even from low- and middle-income workers in fields such as delivery and substitute driving, whose actual tax liability is small once necessary expenses and deductions are factored in. They can recover the difference through the following year's filing, but until then the money they would spend on living costs is tied up.
As this structure of withholding more upfront and refunding later has been compounded by complicated comprehensive income tax filing procedures, demand has grown for paid refund agency services such as Samjjeomsam (whose name is a play on "3.3," the current withholding rate). According to the Fair Trade Commission, their filing agency fees run to 10% to 20% of the refund amount.
Lowering the withholding tax rate has the effect of reducing funds tied up in prepaid taxes. According to the NTS, if the tax law amendment passes, the annual amount withheld from a single-person household earning 45 million won a year will fall to 990,000 won from 1.485 million won, including local taxes. That means the money actually in hand when pay is received will rise by 495,000 won a year, or an average of 41,000 won a month.
The NTS is also expanding direct guidance so that workers can receive refunds of withholding differences without using private platforms. It is providing fee-free guidance on 163.5 billion won to a total of 820,000 people, including personal service workers who failed to file comprehensive income tax returns for the 2021 through 2025 tax years and so did not claim their refunds.
"Withholding an appropriate amount from the start is more convenient tax administration for the public than withholding a large amount and returning it later," NTS Commissioner Lim Kwang-hyun said. "I ask for the active cooperation of the National Assembly so that the government's tax reform package, which includes the cut in the withholding tax rate, can be finalized."
