Your Guide to Shadow Payrolls for Expatriates

Processing shadow payrolls requires comprehensive planning and oversight. But if done right, can reduce your administrative workload and reduce risk of non-compliance. SIRVA can help you establish your shadow payroll processes, automate monthly tasks and reconcile payroll results.

Why create shadow payrolls?
Expatriate assignments can create a wage and tax reporting obligation in multiple countries. In fact, your assignees may fall under a local tax jurisdiction even if they are not receiving pay in that country. 

Example:
Your UK candidate accepts a long-term assignment in the US; however, her pay continues to be delivered in the UK (home country). Because your assignee will be remunerated for services provided in the US, she is liable for certain US taxes as well. These US taxes should be recorded and paid on a “current” basis rather than annually.

As you plan for international assignments in new home and host country combinations, work with your tax provider to confirm reporting requirements and to determine which compensation elements are reportable.

 How do I create a shadow payroll?

1.       Collect all taxable elements delivered in the paying country: salary, allowances, bonus, pension contributions and benefits in kind. 

2.       Convert taxable elements to the appropriate shadow payroll currency and record those same elements in the shadow payroll process.

3.       Process the shadow payroll gross to net, calculating taxes required to cover local obligations.

4.       Deduct the resulting “calculated net pay” amount from the shadow payroll calculation as an offset, producing a zero net pay delivery.

Sample: UK Home to US Host with Pay Delivery in UK

UK (Actual) Payroll

Home Country Element

US (Shadow)Payroll

Shadow Payroll Element

£8000   

Taxable Salary / Other Comp

$12,630

Taxable Salary / Other Comp (equates to home country values converted to shadow country currency at 1.58)

£ (2000)

Home Country Taxes

$(2,125)

Host Country Taxes

£ (500)

Misc Post Tax Deductions

$ 10,505

Calculated Net Pay

$(10,505)

Net Pay Offset

£5500

Net Pay Delivered

$0

Net Pay Delivered 

Why not wait until year end to collect all taxable income?
Local wages and taxes must be recorded and paid to the proper authorities per the schedules legislated in that country. Additionally, tax year end dates are different across the globe. 

Processing shadow payrolls on a monthly basis helps ensure compliance with local laws requiring “current” reporting of compensation earned, taxes due and remitted. Shadow payrolls can also be used to maintain participation in pension and social insurance plans or to satisfy mandatory deductions (i.e. garnishments) or loans owed in the non-paying country.

Best Methods for Helping to Guarantee a Net Zero Pay Delivery on Shadow Payrolls

·         Create a pay element in your payroll system that calculates the Net Pay Offset required

·         Process shadow payrolls in a separate payroll processing batch and do not feed pay results to the bank file

·         Extra precautions:

o   set all banking instructions at the shadow assignee level to a NULL or invalid value

o   review shadow payroll results immediately after processing

By creating a standardized process and following best practices, you can build a successful solution for your organization. SIRVA can collaborate with you to automate processes and reconcile payroll results to deliver a comprehensive, compliant shadow payroll. Interested in learning more?

For a free consultation on best practices for shadow payroll, contact sue.wines@sirva.com.