How U.S. Taxes Korean Income — Salary, Business, Rental
한국 소득의 미국 세금 처리 완전 가이드 — 조약 조항 · FTC 계산 포함 2026

Overview — Korean Income on Form 1040 한국 소득 미국 신고 개요

Once a person is a U.S. tax resident — through the Green Card Test, Substantial Presence Test, or First-Year Election — all worldwide income is subject to U.S. tax. This includes income earned entirely in Korea, paid in Korean won, by Korean employers, and already taxed by the Korean National Tax Service (NTS). The foreign income must be reported in USD on Form 1040 and categorized correctly by income type.

Korean Salary 근로소득 — Article 15 급여 · 임금

Korean Rental Income 임대소득 — Article 6 임대 수입

Korean Business Income 사업소득 — Article 8 개인사업자 · 프리랜서

Korean Severance 퇴직금 퇴직소득

Korean law (근로기준법) requires employers to pay severance (퇴직금) upon termination of employment of at least 1 year. The severance is calculated as approximately 1 month's salary per year of service. U.S. tax treatment depends on when the employment was performed and when the payment is received relative to the U.S. residency start date.

Korean Stock Gains 양도소득 — Article 13 주식 매매 차익

Capital gains from selling Korean stocks or other Korean capital assets are taxable in the U.S. as worldwide income. The U.S. applies its own LTCG/STCG rate structure based on the total holding period — not Korea's tax treatment.

Foreign Tax Credit — Baskets & Calculation 외국납부세액공제 바스켓과 계산

The Foreign Tax Credit (Form 1116) is the primary mechanism for preventing double taxation on Korean income. Critically, the FTC must be calculated separately for two income baskets — and credits from one basket cannot offset tax in the other.

FEIE vs. FTC — Which to Choose 해외근로소득공제 vs. 외국납부세액공제 선택

U.S. citizens and lawful permanent residents living and working in Korea may choose between two mechanisms to reduce U.S. tax on Korean earned income: the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC). The choice is made annually on the tax return, and the optimal choice depends on Korean tax rates paid.

Totalization Agreement — SE Tax Relief 한미 사회보장 협약 — 자영업세 면제

The United States and South Korea have a Totalization Agreement(entered into force April 1, 2001) that coordinates Social Security coverage for workers who earn income in both countries. For Korean nationals in the U.S. — and particularly for Korean self-employed individuals — the Totalization Agreement can eliminate the U.S. self-employment (SE) tax on Korean-source business income.

• The problem without the Totalization Agreement: A Korean national who operates a Korean sole proprietorship while living in the U.S. would, under standard IRS rules, owe U.S. self-employment tax (15.3% on 92.35% of net business income) on Korean business income — in addition to contributing to Korean national pension (국민연금) on the same income. This creates dual social insurance contribution on the same earnings.
• What the Totalization Agreement provides: A Korean worker who is already covered under the Korean National Pension (국민연금) system and pays 국민연금 contributions may be exempt from U.S. Social Security and Medicare taxes (SE tax) on the same Korean-source earnings during a period of temporary assignment to Korea. A Certificate of Coverage (한국어: 적용증명서) issued by the Korean National Pension Service (NPS) documents this exemption.
• Claiming the exemption: Attach the Certificate of Coverage to the U.S. tax return. The SE tax exemption reduces the effective tax rate on Korean business income significantly — the 15.3% SE tax on $30,000 of net business income is $4,238; eliminating this via the Totalization Agreement is a meaningful saving.
• Note on NPS contribution rates changing in 2026: Korea's pension reform beginning in 2026 will gradually raise the NPS contribution rate from 9% total (4.5% employer + 4.5% employee) to higher rates over a multi-year schedule. Check the current-year NPS rate when calculating Korean pension contribution amounts for tax documentation.

Exchange Rate & Documentation 환율 및 필요 서류

5 Fully Computed Examples 실제 계산 사례 5개

Common Mistakes 자주 발생하는 오류

• 1 Thinking "Korea already taxed it, so I don't need to report it to the U.S." Korean taxation of Korean-source income does not substitute for U.S. worldwide income reporting. Both reporting and the FTC claim are required — the FTC eliminates or reduces U.S. tax, but the income must still appear on Form 1040. Omitting Korean income because Korea taxed it creates both an income tax gap and a potential audit flag.
• 2 Claiming FTC in the wrong income basket. Korean salary, business income, and severance belong in the general basket; Korean interest, dividends, rental income, and capital gains belong in the passive basket. Filing a single Form 1116 that mixes all Korean taxes into one basket, or putting salary taxes in the passive basket, produces incorrect FTC limitation calculations and may result in disallowance of part of the credit.
• 3 Not claiming U.S. depreciation on Korean rental property. Korean real estate used as rental property is eligible for U.S. depreciation — 27.5 years (residential) or 39 years (commercial). Many taxpayers report Korean rental income on Schedule E without claiming depreciation, overstating their taxable rental income. The depreciation basis is the Korean purchase price in USD using the acquisition-date exchange rate.
• 4 Not receiving 퇴직소득 원천징수영수증 before leaving Korea. The severance withholding certificate is the primary document supporting the FTC claim on Korean severance income. Once the taxpayer has left Korea, obtaining this document from a former Korean employer becomes significantly more difficult. Request it from HR or the payroll department before the departure date.
• 5 Not considering the Totalization Agreement for self-employment income. A Korean freelancer or sole proprietor who contributes to Korean national pension (국민연금) while a U.S. tax resident may be exempt from U.S. SE tax on the same Korean-source business income under the Totalization Agreement. Failing to claim this exemption with a Certificate of Coverage from the Korean NPS results in paying both Korean pension contributions and U.S. SE tax on the same income — unnecessary double social insurance taxation.
• 6 Assuming FEIE is always better than FTC for Korean income. For most Korean-source income, the FTC is superior to the FEIE — because Korean tax rates (up to 49.5% effective top rate) frequently exceed U.S. rates (up to 37%), generating excess FTCs that carry forward 10 years. The FEIE simply excludes up to $132,900 of earned income without generating any carryforward benefit. For a high-income Korean resident earning significantly above $132,900, the FEIE covers only the first $132,900 while the FTC can cover all Korean-taxed income regardless of amount.
• 7 Not reporting Korean business income on Schedule C because "it's a Korean business." A U.S. tax resident who conducts freelance work, consulting, or sole proprietorship activities — even entirely in Korea, paid in KRW by Korean clients — must report this as Schedule C income. The U.S. taxes worldwide business income of residents. The treaty PE provision (Article 8) affects which country has primary taxing rights, but does not eliminate U.S. reporting.
• 8 Not planning 퇴직금 timing around the U.S. residency start date. Severance received before the U.S. residency start date is Korean-source income of a non-resident alien — not taxable in the U.S. Severance received after the residency start date is taxable in the U.S. (potentially with FTC relief). If the timing of the 퇴직금 payment can be arranged before the first U.S. arrival date, significant U.S. tax can be avoided. This timing decision should be made before departure from Korea.

Hanmi CPA Insight