Revenue is not profit... Basic tax knowledge easy for novice business owners and N-jobbers to miss

When starting a business, it is easy to think that revenue is the same as one's own profit, but this is a dangerous misconception. This is because revenue includes the Value Added Tax (VAT) paid by consumers, and if this is not separated and managed in advance, one may feel financial pressure when it is actually time to pay taxes.

According to this guidance provided by the National Tax Service, the first thing to take care of during the business preparation stage is business registration. It must be applied for within 20 days from the business commencement date, and it can be done through online application via Hometax or by visiting the competent tax office. If business registration is not completed, a non-registration penalty may be imposed, and the disadvantage of being unable to receive a deduction for the input VAT paid during the business preparation process will occur.

Simplified Taxpayer vs. General Taxpayer, the choice based on the business model is key

The most concerning point when registering a business is choosing the taxation type. Individual business owners are largely divided into simplified taxpayers and general taxpayers. Simplified taxpayers are subject to a lower tax rate to reduce the tax burden on small-scale individual business owners, but there may be some restrictions on issuing tax invoices. Therefore, it is advantageous for small-scale businesses that mainly target individual consumers.

On the other hand, general taxpayers calculate VAT by subtracting the input tax from the sales tax. A characteristic is that the full amount of input tax paid when purchasing goods or services for the business can be deducted. Therefore, if the scale of sales is large or if there are many business-to-business (B2B) transactions where issuing tax invoices is essential, being a general taxpayer is more suitable. However, caution is required as the application of simplified taxation may be restricted when operating as a general taxpayer or when inheriting the rights and obligations of a general taxpayer through a comprehensive transfer of business.

The key to managing comprehensive income tax lies in 'evidence.' Comprehensive income tax is calculated based on the amount remaining after deducting necessary expenses used for the business from the business income. No matter how much was spent for the business, it is difficult to have it recognized as an expense without qualified evidence such as tax invoices, cash receipts, or credit card sales slips. To this end, using a separate business account or card to clearly distinguish business-related income and expenditures is a way to facilitate subsequent bookkeeping and tax filing.

Side income of N-jobbers, must distinguish between 'business income' and 'other income'

Recently, the number of 'N-jobbers' who generate income from activities other than their main job, such as operating blogs or Smart Store, is increasing. In this case, the treatment under tax law differs depending on the nature and repetitiveness of the activities. If income is obtained repeatedly in an independent capacity, it is classified as 'business income,' and income that occurs temporarily or accidentally, such as lecture fees or prize winnings, is classified as 'other income.'

In the case of other income, if the amount excluding necessary expenses is 3 million won or less per year, one can choose separate taxation. If separate taxation is chosen, the tax obligation is terminated with the tax already withheld at the source, so there is no need to file a comprehensive income tax return in May of the following year. However, if the side job is not temporary but has a repetitive nature, it is considered business income and must be reported for comprehensive income tax.

The most important thing for office workers to be careful of when doing a side job is the fact that they must combine and report the earned income received from their existing workplace with the side job income. It is easy to think that all tax issues are resolved with the year-end settlement, but if there is income subject to comprehensive income tax reporting, such as business income, it must be reported again in May by combining it with earned income. At this time, as the side job income is combined with earned income, the tax base may rise, increasing the overall tax burden.

Caution regarding 3.3% withholding tax and additional health insurance premium burden

When working a side job in the form of a freelancer, they usually undergo a 'withholding' method where 3.3% of the income is taken in advance as tax. Many people misunderstand that no additional reporting is necessary because they have already paid the 3.3%, but this does not mean the final tax amount has been determined. This is because the final tax amount is determined by recalculating actual income and expenses during the comprehensive income tax filing in May. If the 3.3% tax paid in advance is more than the actually calculated tax, the difference can be refunded, but conversely, if the tax is more, an additional payment must be made.

One of the effects that side job income has besides taxes is health insurance premiums. Even for office workers, if income other than earned income (business income, interest/dividend income, etc.) exceeds 20 million won per year, a separate health insurance premium is imposed on the excess amount. Also, even if one is registered as a dependent for a family member's health insurance, if income exceeding a certain standard occurs due to side job income, etc., the eligibility as a dependent may be lost, leading to a situation where separate health insurance premiums must be paid. Therefore, if you start a side job, it is necessary to check in advance the changes in taxes and health insurance premiums according to the nature and scale of the income.

Source: original video (YouTube)