Under the Korean income tax law, employment income is classified either as Class A or Class B income. Class B income is employment income received from a source outside Korea and is not deducted by an entity in Korea.
Class A income is the employment income received inside Korea.
Class A income is subject to monthly withholding payroll tax by the employer. If the employer fails to perform the withholding obligation, 10% of the concerned tax will be assessed on the employer as penalty. Since, in the case of Class B income, the employer paying the income does not necessarily reside in Korea, the employee himself is responsible for paying his personal income tax. Class B income earner may either join a Taxpayers' Association to pay monthly withholding payroll tax or may wait and file an annual tax return in May of the following year. If Class B income earner joins a Taxpayers' Association and pay taxes monthly through the association, he would receive a 10% tax credit, whereas no credit is available in the event of filing an annual tax return. However, if he has Class A and Class B income, he must file an annual tax return.
Please note that if the salary income paid to the employees is deducted from the taxable income of a foreign corporation's permanent establishment in Korea to which they belong, the salary income will be categorised as Class A income, not Class B income, even though the income is paid directly by the foreign corporation's head office in a foreign country.