Shadow payroll helps businesses manage tax compliance when employees work in a different country than their payroll is processed.
A shadow payroll is needed when an individual works in a country other than the one where they are paid. This requires two payrolls to ensure tax compliance in both the home and host locations. Shadow payroll allows employers to manage taxes and social security for employees working abroad, while keeping them on their home country payroll for benefits like pensions.
Before the pandemic, shadow payroll was typically used for traditional assignments where employees were seconded to work in another country. These employees stayed on their home country’s payroll, even if no tax was due, to maintain their benefits and ensure accurate social security contributions. However, when employees are taxable in the host country, the employer must operate payroll there too, to meet local withholding and reporting obligations. This is where shadow payroll comes in, tracking the compensation paid by the home payroll and calculating the required tax for the host location.
With the rise in short-term business travellers, commuters, and remote working since the pandemic, the demand for shadow payrolls has surged. Employees often choose to work from different countries while remaining employed in their home country. In such cases, they may still be liable for taxes in both their home and host locations. Shadow payroll helps companies manage the interaction between multiple tax systems, reducing the risk of non-compliance and penalties.
One of the key benefits of shadow payroll is that it helps manage tax risks for both the employer and the employee. For example, if an employee owes taxes in the host country, shadow payroll can adjust home country tax withholdings to avoid cash flow issues. Without this, the employee might have to pay taxes in the host country before receiving a refund from their home country, leading to financial strain. Shadow payroll also ensures timely claims for foreign tax credits, preventing the possibility of double taxation.
Operating an accurate shadow payroll enables businesses to meet local tax withholding and reporting requirements, minimizing the risk of penalties, interest charges, or damage to their reputation. For employees, it ensures continued access to home country benefits while avoiding potential exchange rate risks by maintaining part of their pay in the home currency. This also simplifies the complex tax interactions that arise when working across borders.
Shadow payroll is an invaluable tool for managing tax compliance, reducing risk, and supporting global mobility.
As global mobility trends evolve, shadow payroll has become an essential component of managing international assignments and remote working arrangements. By keeping businesses compliant with local tax laws and reducing the risk of double taxation, shadow payroll helps both employers and employees manage the complexities of working across borders.