foreign Income Tax: Do I Need to File? the Complete Guide

do I really have to pay taxes on money earned abroad?

recently, an acquaintance of mine came to me with a question about earnings from overseas freelance platforms. He didn't know if he had to pay taxes in Korea even though he received the money in dollars. The short answer is that if you are a resident of Korea, you must pay overseas income tax on money earned abroad.

korea's income tax law determines tax obligations based on residency, not nationality, so if you live in Korea, even if you're not a Korean citizen, you have to pay taxes on your worldwide income, and if you live abroad, you only have to pay taxes on your domestic income.

what's the difference between residents and non-residents?

to determine whether you're taxed on your foreign income, you first need to determine whether you're a resident or non-resident.

tax brackets for residents

a resident is someone who is domiciled or present in the country for at least 183 days. A resident must file a comprehensive income tax return on all income earned around the world, including not only domestic income, but also foreign earned income and foreign business income.

tax brackets for nonresidents

a nonresident is someone who doesn't have an address or residence in the U.S. A nonresident only has to pay nonresident income tax on income earned in the U.S. Money earned abroad isn't reportable.

understanding the 183-day residency test

the 183-day resident test isn't just about the number of days you're in the country. You're classified as a resident if you meet any of the following conditions.

first, you have a job that requires you to be in the country for more than 183 days; second, you have a family member who lives in the country and is expected to live there for more than 183 days; or third, you have an address in the country.

for example, if you work abroad but have a spouse and children living in the country and plan to return at any time, you can be considered a resident. In this case, you'll be required to report your foreign earnings.

foreign tax credit to avoid double taxation

double taxation is one of the most common concerns when you have overseas income. If you've already paid taxes abroad and have to pay them again in Korea, it's too much of a burden. Fortunately, there is a foreign tax credit system to prevent double taxation.

if you have already paid taxes in the country where you earned income, you can deduct that amount from your Korean taxes. For example, if you paid 1 million won in taxes in the U.S. for income earned in the U.S., you can deduct 1 million won from your Korean comprehensive income tax.

however, you'll need proof that you paid taxes in a foreign country to claim the deduction, so make sure to keep your foreign tax receipts or tax certificates handy.

how to report overseas income for comprehensive income tax

you can file your foreign income tax return from home or have a tax preparer do it for you.

when filing, you need to categorize the types of income you earned overseas, such as overseas earned income tax, overseas business income tax, and so on. In particular, income received in foreign currency must be converted to Korean won at the exchange rate on the date of receipt.

you may also be interested in our basic guide to filing a comprehensive income tax return, how to file freelance taxes, and how to work from home.

what happens if you don't file?

the penalties for failing to report foreign income are significant.

if you don't file at all, you're subject to a failure-to-file surcharge, which adds 20 percent to the tax you owe, rising to 40 percent if it's determined that you're cheating.

if you file but pay late, you're subject to a late payment surcharge, which accumulates interest on a daily basis, so the later you pay, the more expensive it gets.

the IRS has access to your overseas income through the Automatic Exchange of Financial Information Agreement, so even if you try to hide it, it's likely to be found out eventually, so it's best to file on time and truthfully.

frequently asked questions

do I need to report earnings from foreign platforms?

yes, earnings from foreign platforms like YouTube, Amazon, and Upwork are subject to foreign income tax as long as you're a resident of the country.

i already paid taxes abroad, do I need to pay again?

the Foreign Tax Credit allows you to deduct the amount of tax you paid abroad from your domestic taxes, so be sure to take advantage of this double taxation protection.

do I have to declare any income?

you're required to declare any foreign income, regardless of the amount, but you may not actually owe any tax after applying various deductions.

how do I convert foreign currency earnings?

you need to convert your income into Korean won at the exchange rate on the day you received it, which is the rate of exchange quoted by the bank.

what if I miss the deadline?

it's best to file as soon as you realize it, even if it's after the deadline. The later you file, the more tax you'll have to pay.

conclusion

if you're a Korean resident, you must report your foreign income taxes even if you earned money abroad. Don't miss the May tax filing deadline and take advantage of the foreign tax credit to reduce the burden of double taxation.

let us know if you have any questions in the comments. and don't forget to subscribe to our blog for more helpful tax tips.