Demystifying Shadow Payroll: A Beginner’s Guide

When you send an employee to work abroad as part of your international business expansion while still employing them on the payroll of your home office, figuring out taxes can be difficult. Do they need to be taxed in both countries? The answer is typically a resounding yes. International payroll is made easier, however, through shadow payroll, a system used when reporting and paying an employee’s taxes in their host country, as they work under their home country’s payroll system.

Shadow payroll is a mysterious term that sounds much more complicated than it actually is. Here, Galvin International explains the basics of shadow payroll, demystifying the process and demonstrating how it can be seamlessly incorporated into your expansion and international payroll services.

A Working Example

When a business decides to expand internationally, it is often within their best interest to send members of their current team to the new country for the interim to make for a smooth transition period. Senior employees bring imperative knowledge to the team and will be able to help bring your new office up to speed more quickly

To understand shadow payroll more clearly, let’s look at a likely scenario. Let’s say a UK company sends an employee to the US temporarily to help set up their company, and decides to pay them through their UK payroll. You wouldn’t want your international payroll providers to set up a US payroll for the employee, as they don’t need to be paid twice. Still, something must be put in place to monitor what taxes are to be paid to the US government.

This is where shadow payroll comes in. By establishing a shadow payroll in the US, you will ensure your employee is fulfilling their US tax and social obligations, while also complying with their UK fulfilments as well.

Shadow payroll is run by calculating the tax owed under US law based on the employee’s earnings, which includes non-salary benefits, as well. Then, this shadow payroll is used to report and pay taxes to the US – but not to pay your employee. Not so complicated, right?

If you do not set up shadow payroll, you may face penalties, fees and interest; therefore, it is worth taking the time to set up the process properly in order to prevent future monetary damages. What’s more, you’ll have the peace of mind that you’ve set followed all the rules and compliances that come with expanding your business internationally. Ensure that your payroll provider or manager has the resources to understand how process should work in different markets, as it does vary by country.

When setting up a business abroad, payroll is a vital aspect to consider. Will you take care of it in-house? Will you outsource the process? You’ll also have to decide whether to pay your employees in the market at hand or if they’ll be on their home country’s payroll (this can vary according to local law and depending on your circumstances).

Galvin International can help with all of these different scenarios, with experts who can guide you through the process and seamlessly integrate all of your international payroll services into your day-to-day, including shadow payroll. Get in touch with us today and streamline your international payroll services.

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