Why Start Preparing Now, in September?
If you plan to pay bonuses at year-end or early next year, the time to prepare is now. The tax benefits for performance bonuses apply only if you sign a written profit-sharing agreement and obtain profit-sharing SME certification before the bonus is paid. Bonuses already paid generally can't qualify after the fact.
The performance bonus tax incentive is set to expire. It covers only bonuses paid by December 31, 2027, which leaves just two chances: 2026 and 2027In a tight labor market, it lets you offer more competitive pay without raising base salaries and fixed costsHow the Profit-Sharing SME Program Works
The program is based on the Act on Special Measures for SME Workforce Support and Article 19 of the Restriction of Special Taxation Act. Eligible forms of profit-sharing include performance bonuses, employee stock ownership, stock options, the Naeil Chaeum Mutual Aid program, and wage increases.
To get a Profit-Sharing SME Certificate from the Ministry of SMEs and Startups, you typically need:
A profit-sharing agreement, or the equivalent terms in your work rules or collective agreementProof that employees were informedYour business registration, SME certificate, and a list of employees enrolled in social insuranceTwo Tax Benefits: Both Company and Employees Gain
Company: deducts 10% of performance bonuses paid to regular employees from corporate or income taxEmployees: get a 50% reduction in the income tax on the bonus. Employees with total salary above the threshold (KRW 70 million) and largest shareholders or their related parties don't qualify, so identify who is eligible firstDisqualification: if your regular headcount falls below the previous year's level, the company loses the credit. If you expect layoffs or more resignations, check this firstRates and requirements can change when the law is amended. Confirm the rules in force with a tax advisor before you pay.
Running the Numbers
Say you pay 30 employees KRW 3 million each, KRW 90 million in total.
Company tax credit: KRW 90M × 10% = KRW 9 millionTax saved per employee (excluding local income tax, assuming the whole bonus falls in one bracket) - 6% bracket: KRW 180K in tax → KRW 90K saved
- 15% bracket: KRW 450K in tax → KRW 225K saved
- Because of the KRW 70 million salary cap, eligible employees realistically never reach the 24% bracket
If all 30 employees are in the 15% bracket, they save KRW 6.75 million in total. Add the company credit and taxes fall by about KRW 15.75 million. Pay the same KRW 90 million as an ordinary bonus without an agreement, and you get none of these benefits.
Designing the Profit-Sharing Agreement
Base payouts on objective metrics such as operating profit or revenue targets, and put them in writing before any paymentSpell out who is eligible, how the bonus is calculated, and when it will be paid, then share this with all employeesCommon mistakes to avoid:
Paying at the CEO's discretion without a clear formulaDirecting most of the money to a few executives, which defeats the program's purposeLeaving the bonus's legal nature undefined. Court rulings are still divided on whether bonuses count toward ordinary wages or the average wage used to calculate severance pay. State clearly in the agreement that the bonus depends on business results, both in whether it is paid and how muchExtra Benefits of Certification
Policy advantages: bonus points in policy financing and R&D grant evaluations, plus priority in workforce support programs (check each program's notice)Hiring and retention: a clear promise to share profits helps your employer brand and lowers turnoverFairness: tying bonuses to OKRs or KPIs gives rewards a clear basis and reduces internal disputesKITIM's Performance Reward Consulting
KITIM supports the entire process: KPI design → agreement drafting → certification support → tax review with partner advisors. We also offer integrated consulting that combines this with performance reviews and pay structure reform. To get tax benefits on this year's bonuses, now is the right time to start. Don't miss the two remaining chances. Contact a KITIM consultant today.
