While the employee is still being paid from the home country payroll, the applicable tax and social security liabilities (in the host – country) are calculated and filed to the host country authorities using the “shadow payroll” approach. In essence, all payments and benefits made in the home country must be “shadow” reported by the company entity or payroll provider in the host nation. This also includes any additional payments made directly in the host country shadow payroll or through an Employer of Record.
The job details of an employee may seem straightforward enough, but it has its share of difficulties depending on the employee’s home and host locations, their position, their employment status, and the place where expenditures are incurred for their work. Businesses must be aware of any shadow payroll requirements when employees travel internationally, whether for a short period of time or for an extended period of time, as it can be a complicated procedure that calls for in-depth knowledge and expertise.
WHAT IS SHADOW PAYROLL?
A shadow payroll, also known as shadow payroll process is a payroll mechanism that doesn’t actually pay the employee; instead, it’s a method that enables the company to comply with local payroll tax filing and payment requirements by “shadowing” or copying the compensation reporting from the home payroll.
WHEN DO COMPANIES USE SHADOW PAYROLL?
When payroll withholding taxes are due in a location other than where the employee is actually paid, businesses use host country shadow payroll. In reality, a shadow payroll is run in another jurisdiction while the employee is paid in another, often their home region (usually the host location). No actual compensation is supplied through the shadow payroll accounting; rather, it runs in the background to satisfy the employer’s payroll tax responsibilities in the relevant jurisdiction. The shadow payroll‘s sole purpose is to compute and pay over the necessary payroll taxes.
WHY IS SHADOW PAYROLL IMPORTANT?
Data gaps and inaccuracies are frequently the main causes of problems when it comes to getting the flow of data from various sources to home country shadow payroll and host country shadow payroll as the mobile workforce continues to grow. Due to the circumstances in assignment regulations, as well as the intricate reporting and tax position mandates by the nations where employees are working, many businesses are now trying to establish a strong global shadow payroll accounting system.
WHAT ARE THE KEY AREAS WHEN A SHADOW PAYROLL REQUIREMENT MIGHT ARISE?
Shadow payroll process can be utilized for much more than only managing assignees on long- and short-term assignments. Additionally, it can apply to project workers, business travelers, and employees that need additional flexibility in their job schedules due to commuting, remote work, or virtual tasks.
Following are the job roles that may significantly need a shadow payroll accounting from their original employers or Employer of Record:
- Workers on international long-term and short-term assignments
- Project based workers
- Digital Nomads
- Remote Workers
- Workers for Virtual Assignments
Workers on international long-term and short-term assignments – It makes sense that a long-term assignment would necessitate shadow payroll accounting as the assignees are typically kept on home contracts and their stays in the host country can last for two to three years. Many such workers will continue to receive various benefits from their home country if available, as well as supplementary allowances, taxable costs related to their assignment, and a guaranteed net wage. Given that the assignee typically has taxable income subject to withholding in both the home and host locations, short-term assignments by their very nature can be more problematic for tax calculation and reporting.
Project based workers – If the host company covers their costs or if an economic employer rule is enforced by the tax laws of the host country, employees are more likely to have a shadow payroll obligation. Employers who want to make sure that the project expenses are accurate should have a special policy in place to handle additional tax and other employment benefits expenditures. Payroll accuracy and timeliness are typically seen as essential for business operations. Even when submitting a proposal for the project, every situation should be examined beforehand.
Digital Nomads – Employees that work remotely frequently and may travel to different locations throughout the year are known as digital nomads. Since it is doubtful that these personnel will dwell in any one nation, tax treaties would often not apply to them. To cut expenses and lessen the administrative load, certain businesses may use Global Employer of Record for these categories of workers.
Remote Workers – Without even mentioning any potential corporate repercussions, it is likely that working remotely might result in a tax burden for the person in the working location. If the remote job is approved and the employee moves to the host country but continues to receive salary through the home country shadow payroll, shadow payroll accounting may be necessary.
Workers for Virtual Assignments – Another type of remote work is virtual assignments, which operate the other way from the previous example: the employee stays at home while performing tasks for the host location. While the employee will primarily work in and be paid by the home location, payment arrangements must be tactfully done in terms of tax compliance, and while the responsibilities in the host country and the cross-charging of the employee’s expenses may require significant compliance from the payroll company and the host country where the work is being done.