Freelancer's May Filing: Business Income, 3.3% Withholding and VAT Exemption
It is April 2025. Ms. Han, a resident individual with no dependents, works as a freelance technical translator for several domestic publishers. During 2024 she billed 60,000,000 KRW for translation services; each client withheld 3.3% (1,980,000 KRW in total) and paid the balance. She has no employees and uses no subcontractors. Her documented, business-related expenses for 2024 were 12,000,000 KRW: a laptop, software subscriptions, home-office utilities and professional books. She also received 3,000,000 KRW of interest from a bank deposit, from which 15.4% was withheld. She never registered for VAT and never issued a tax invoice. She tells you that 'the 3.3% already settled my tax' and plans to file nothing in May 2025. She has no pension or insurance deductions, claims only the basic personal deduction, and you may ignore all tax credits except the credit for tax already withheld.
1. Characterise the translation income and the 3.3% deduction, explain the VAT position, and advise whether Ms. Han must file a return for 2024.
Read the worked answer
Character. Ms. Han supplies translation personally, continuously and independently, using her own equipment and employing nobody. That is business income from personal services, not wage income and not one-off other income. The 3.3% taken by clients is the 3% withholding on business income paid to a resident individual plus 0.3% local income tax; it is a prepayment, not a final settlement.
VAT. Personal services supplied by an individual who has no employees are VAT-exempt, so she was right not to register or issue tax invoices. Her clients' 3.3% deduction has nothing to do with VAT.
Filing. Because she has business income, she must file a global income tax return for 2024 by 31 May 2025, report income and expenses, compute tax and credit the 1,980,000 KRW withheld. Filing nothing exposes her to the unfiled-return penalty (generally 20% of the assessed tax) and a late-payment surcharge, even though tax was withheld at source. The interest is financial income of 3,000,000 KRW, below the 20,000,000 KRW threshold; 14% plus 1.4% local tax was withheld, so it is taxed separately and is not added to her global income.
2. Compute her 2024 global income tax base, the income tax still payable and the local income tax still payable. Rates: 6% up to 14,000,000 KRW; 15% on the excess over 14,000,000 up to 50,000,000 KRW. Local income tax is 10% of income tax.
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- Business income: 60,000,000 - 12,000,000 = 48,000,000 KRW.
- Interest: separate taxation at 14% + 1.4% local; excluded from the global base.
- Deductions: basic personal deduction 1,500,000 KRW only.
- Tax base: 48,000,000 - 1,500,000 = 46,500,000 KRW.
- Income tax: 14,000,000 x 6% = 840,000; 32,500,000 x 15% = 4,875,000; total 5,715,000 KRW.
- Credit for withholding: 60,000,000 x 3% = 1,800,000 KRW.
- Income tax still payable: 5,715,000 - 1,800,000 = 3,915,000 KRW.
- Local income tax: 5,715,000 x 10% = 571,500; less 180,000 withheld = 391,500 KRW.
- Total due by 31 May 2025: 3,915,000 + 391,500 = 4,306,500 KRW.
The key trap is treating the 3.3% as final. It covers only 1,980,000 KRW of a 5,715,000 KRW income tax bill, and the local surtax must also be topped up.
3. What records should support the 12,000,000 KRW of expenses, and what happens if she cannot prove them?
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The burden of proving necessary expenses lies on the taxpayer. She should keep invoices or card receipts in her business name showing supplier, date, amount and VAT, plus bank statements and a simple ledger linking each item to the translation business. Home-office utilities must be apportioned on a defensible basis, for example floor area used exclusively for work.
If she cannot substantiate the expenses, the tax office may disallow them and assess income on the gross amount, or apply the standard expense rate (simple or standard rate) if she is eligible for simplified bookkeeping. That estimated method may give a lower deduction than 12,000,000 KRW, so her tax could rise well above the figure computed above. Understated income can also attract an underreporting penalty. The practical advice is to reconstruct the evidence now, before the May return, and to keep books for 2025 so the problem does not repeat.