South Korea has the 13th largest economy in the world, with a workforce of almost 30 million. As of July 2022, some 5.69 million South Korean workers were self-employed, which means global companies can source skilled independent contractors in the tech hub of Seoul, the port city of Busan, and elsewhere throughout the nation.
But if you’re going to work with South Korean contractors, you need a game plan for how you’ll pay them quickly and compliantly. From avoiding misclassification to factoring in exchange rates and choosing the easiest payment methods, this guide will walk you through the basics.
Step #1: Classify your workers in South Korea
South Korea’s Labor Standards Act defines employee relationships, while the country’s Civil Code regulates independent contractor agreements. The distinction between these two worker classifications is crucial. If a company categorizes a worker as a contractor when they’re actually an employee, labor courts may compel them to retroactively administer benefits and impose other penalties.
Courts that find some aspects of an employment relationship between a company and a worker initially classified as a contractor may force the company to pay severance upon the worker’s termination.
South Korean authorities often look beyond the terms of a written agreement and look at the facts of a working relationship when judging misclassification. The table below lists common criteria.
High level of worker control. Contractors work independently, with more autonomy over when, where, and how they render services to a client.
More direction from the employer. Employers have more decision-making power over employees in terms of how work is performed, which workplace rules are mandatory, how internal company guidelines are enforced, and more.
Equipment, tools, and other work assets are owned by the worker.
Equipment, tools, and other work assets are typically provided by the company.
Less integrated. Contractors are more likely to work outside of the office and are not subject to the same day-to-day workplace affairs as employees.
Highly integrated. Employees play a more active role in daily company affairs, often working on company property within set working hours.
Limited entitlement to benefits. Contractors, like all South Korean citizens, are guaranteed National Health Insurance coverage. In rare cases, they can be eligible for severance pay. But, contractors are not entitled to other benefits and withhold their own taxes.
Entitled to benefits. Employees are offered certain entitlements, such as retirement benefits, accident compensation insurance, public holidays, parental leave, sick leave, and probation periods. Employers withhold taxes on behalf of employees.
Time-bound agreement. Contractors are typically engaged for a specific project or period of time, submitting invoices when their engagements end.
Indefinite contract. Employees are generally hired for an indefinite period of time, though South Korea does recognize fixed-term employment terms of up to two years.
Risk of loss. Contractors assume liability for their work.
No liability. Employees are generally protected from liability for all work-related matters.
Subcontracting. Contractors can delegate work to third parties.
No subcontracting. Employees are expected to do their own work unless they have permission to assign it to someone else.
Non-exclusive services. Contractors are typically free to render services to multiple clients at once.
Exclusivity of service. Employees typically can’t perform similar work for competitors or other companies without an employer’s knowledge and consent.
Step #2: Determine the best way to pay your contractors in South Korea
Before rendering a South Korean contractor’s services, companies must first figure out how to pay them. The process should be explained in the written contractor agreement. No matter the method, keep in mind that in South Korea, you’re expected to pay independent contractors within 30 days of them submitting an invoice.
The most common payment methods include:
- Bank wires. If you open a South Korean bank account, you can submit funds to South Korean freelancers via direct deposit. Or you can use your native bank account to send an international wire transfer through the SWIFT network, which comes with banking fees and service charges.
- International money orders. Similar to paper checks, this method involves sending a physical payment through the mail. But, the process can be time-consuming. Companies have to go to a Western Union, bank, or post office to purchase the money order. Then contractors have to go to their bank for a deposit once it’s received. In addition to this being slow and cumbersome, money orders also come with wire fees and unfavorable exchange rates.
- Digital wallets or payment platforms. Companies can also use online services to transfer funds. But, keep in mind that some payment platforms are unavailable in South Korea (e.g., Venmo only works within the US), and some popular digital platforms in South Korea—like Kakao Pay and Naver Pay—have less widespread adoption elsewhere. You should also consider vendor fees and volatile exchange rates.
- Global payroll services. Since independent contractors don’t get their taxes withheld, they aren’t typically in the same payroll system as employees. But if you use a global payroll service like Rippling, you can pay both classes of workers in South Korean won (KRW) in a single pay run.
Step #3: Use global payroll software to process payments for South Korean contractors
Instead of worrying about hidden fees, fickle exchange rates, and slow processing times, you can pay South Korean contractors through global payroll software.
With Rippling, not only can you pay employees and contractors around the world simultaneously, but you can also pay South Korean contractors in won without fretting over manual currency conversions. Additionally, you can distribute compliant contractor agreements, collect e-signatures, and store them all in Rippling’s easy-to-use platform.
Here’s a glimpse of Rippling in action:
Step #4: Ensure your South Korean contractor has the right tax information
In South Korea, independent contractors are responsible for paying their own taxes. This includes a personal income tax (under a progressive tax rate), a health insurance tax of about 3.5%, and a value-added tax (VAT) if the contractor is hired indirectly through an EOR or other form of umbrella company.
Contractors file annual tax reports on their income using the National Tax Service’s (NTS) online platform, known as the HomeTax portal, where they can also apply for applicable deductions and exemptions. If the contractor decides to operate under a sole proprietorship, they can visit a local NTS office to set up that kind of business structure. But remember, some industries (like food service) may require additional, special licensing.
For tax purposes, South Korean contractors typically need:
- Copies of all invoices issued
- Receipts of invoices paid
- Receipts for any tax-deductible expenses
- A “Report of Deduction & Tax Credit from Income” from the NTS
All necessary tax filing forms are available on the NTS website. South Korean contractors are also subject to a 10% local income tax on top of their gross tax.
This may sound like a lot to keep track of. One of the benefits of running payroll through a global system like Rippling is offloading the paperwork for South Korean contractors and the rest of your global workforce.
Frequently asked questions about running payroll for contractors in South Korea
Do you need to withhold taxes when paying contractors in South Korea?
No, companies don’t need to withhold taxes on a South Korean contractor’s behalf. Independent contractors handle their own income taxes, contribute to the National Health Insurance Scheme, and, if applicable, pay a value-added tax.
By contrast, companies are responsible for withholding employee taxes on income and making social security contributions for employment insurance, National Pension contributions, maternity leave, and more.
What is South Korea’s minimum wage?
As of 2023, South Korea’s hourly minimum wage is KRW 9,620 but is set to increase to KRW 9,860 in 2024.
Do South Korean contractors get benefits?
Independent contractors in South Korea are entitled to health insurance but otherwise don’t get the same benefits as employees. In rare cases where aspects of a contractor’s work resemble an employment relationship, the contractor may be entitled to severance pay if their contract is terminated.
Can you pay contractors in South Korea in your home currency?
While it isn’t mandatory to pay independent contractors in their native currency (South Korean won), it’s generally expected. Payment in a separate form of currency needs to be stipulated in a written contractor agreement.
Can you manually pay contractors in South Korea?
Yes. Some small business owners manually process contractor payments in an effort to save money. However, this process can become time-consuming when you work with multiple South Korean contractors and potentially others in different countries. If you don’t pay an independent contractor quickly, they may seek to render their services elsewhere.
Additionally, manual payment processing comes with risks:
- Compliance. Running payroll manually leaves companies vulnerable to errors, omissions, and unintentional violations of South Korean employment laws. Rippling, however, can automatically generate locally-compliant contractor agreements.
- Security. Manual payroll processing—through spreadsheets, paper records, and other DIY ledgers—can lead to sensitive employee data being lost, stolen, or misused.
How do you turn a contractor into an employee in South Korea?
After working with a South Korean contractor for a while, you may want to give them more responsibility and hire them as a full-time employee. While this can be tricky without deep knowledge of South Korean labor laws, Rippling can help. With Rippling, you can transition contractors to full-time employees, onboard them with legally compliant paperwork, administer benefits and payroll, and more—all in a single place.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.