Shadow payroll is when a business calculates the appropriate tax and social security liabilities (in the host location) and submits that information to the host country authorities. The employee is ultimately paid from the home country payroll.
A shadow payroll doesn’t pay the employee; it’s used as a way for the employer to meet local payroll tax payments and reporting responsibilities. When running shadow payroll, it is important to translate the home country payroll amounts into the host currency. Local tax rules and reliefs should also be applied.
Why is shadow payroll important?
Running shadow payroll is important because it helps businesses accurately meet the tax and social security reporting obligations from the host country. The shadow payroll allows employers to remain compliant with the tax laws of both the home country and the host country, as it reports compensation to the respective authorities in both countries.
Running a shadow payroll doesn’t mean that the employee is getting paid twice. After the shadow payroll calculations, the net amount payable to the employee will be netted down to zero.
What is an example of shadow payroll?
The following is an example of shadow payroll:
A US-based company sends an employee to Singapore for three years to open and manage a new office. While in Singapore, the employee may be liable to pay tax and social insurance in both locations. To avoid this, they’ll stay on the US payroll. This company would use a shadow payroll to report tax withholding obligations in Singapore.
How do you know if you need to use shadow payroll?
The following questions can determine whether to use shadow payroll:
- Are any employees on global assignments?
- Is the employee’s assignment short-term or long-term?
In many cases, business trips that are shorter than six months do not require a shadow payroll. The employee will remain on home payroll and the host country likely won’t require payroll reports for benefits.
If the assignment is longer than six months, the host country usually requires the business to put the employee on payroll, where a portion or all of the employee’s income can be subject to tax in the host country. The employee will stay on the home country payroll, but shadow payroll will be required.