Employees may receive allowances from companies stipulated in the Labor Standards Act, in addition to salaries and bonuses. Among them are absence allowances and absence compensations, which are taxed as follows.
1. What are absence allowance and absence compensation?
Absence allowances are defined in Article 26 of the Labor Standards Act as “an allowance paid by the employer to the worker in the event of an absence from work for reasons attributable to the employer.” This allowance is taxable and requires source deduction, since it is considered a part of the salary.
Absence compensation, on the other hand, is paid to a worker who is unable to work due to work-related injuries, as explained in Article 76 of the Labor Standards Act. The employer must pay the part not covered by the social insurance program. Specifically, absence compensation benefit will be provided from the fourth day after the occurrence of the accident. Therefore, the company has to pay the compensation for three days following the accident. The company is exempted from the obligation of three-day payment in the case of an accident during commutation. The compensation benefit will be paid from the fourth day for the period of absence during which the worker will not be paid wages.
The absence compensation provided from the fourth day is worth about 60 percent of the worker’s base daily salary with 20-percent additional amount as a special benefit, covering 80 percent of the normal wage.
2. Difference in taxation
Absence allowance is a part of salary, which is taxable and subject to source deduction. Meanwhile, absence compensation is considered equivalent to compensation for physical or psychological damage under the Civil Code, which is not taxable. The absence compensation benefit provided from the fourth day is also exempt from tax and does not have to be included in the tax return.
(Source: Income Tax Act, Articles 9, 28; Income Tax Act Enforcement Ordinance, Articles 20, 30; Income Tax Act Basic Instructions 9-24)
Absence allowance (Article 28, Labor Standards Act), paid to workers during temporary suspension of the company operations are considered a part of salary and subject to source deduction. Meanwhile, absence compensation (Article 76, Labor Standards Act), paid to workers who need medical treatment due to work-related injuries, etc. is non-taxable income.
Many companies have paid their employees “absence allowances” during and after the period of COVID-19 state of emergency. The Labor Ministry has stated that the companies should examine each case individually whether it is attributable to the employer and determine whether the allowances are taxable. (Labor Ministry website “COVID-19 Q&A for companies)
Absence due to force majeure for which companies are exempted from compensation, described in the Q&A, are the following. Both conditions must be met.
(1) An accident caused by reasons outside the company
(2) An accident that could not be avoided by maximum efforts by the employer as an ordinary business operator (The employer must show that specific measures have been made with utmost effort to avoid suspension of operation.)
‘Absence allowance (Article 26, Labor Standards Act) → Salary income
An allowance of at least 60 percent of average wage in the case of an absence from work for reasons attributable to the employer
‘Absence compensation (Article 76, Labor Standards Act) → Tax-exempt income
An allowance of 60 percent of average wage to a worker (employee) who suffered work-related injuries, etc. and take leave of absence for the treatment.
