What is shadow payroll?

Shadow payroll is a process used by businesses when they have employees working in a host country while remaining on the home country payroll. It involves calculating and reporting the tax and social security liabilities of the employee in the host country to meet local payroll tax payment and reporting requirements.

Why is shadow payroll important?

Shadow payroll is important because it allows businesses to comply with the tax laws and reporting obligations of both the home country and the host country. It ensures that the appropriate taxes are paid and reported to the respective authorities, even though the employee remains on the home country's payroll. Shadow payroll prevents double taxation of the employee's income.

Can you provide an example of shadow payroll?

Sure, here's an example: A US-based company sends an employee to Singapore for a three-year assignment. The employee continues to be paid by the US company's payroll but may also have tax and social insurance liabilities in Singapore. To meet Singapore's tax requirements, the company uses shadow payroll to calculate and report the employee's tax withholding obligations in Singapore while keeping them on the US payroll.

How do you determine if shadow payroll is needed for an employee?

To determine whether shadow payroll is needed, consider the following questions: Is the employee on a global assignment? Is the employee's assignment short-term (typically less than six months) or long-term (typically longer than six months)?

Generally, shorter assignments may not require a shadow payroll, as the employee can remain on the home country's payroll, and the host country may not require payroll reporting for short-term benefits. However, for longer assignments, the host country often requires the employee to be on the local payroll, and shadow payroll becomes necessary to meet reporting requirements.