Shadow payroll

Managing the salaries of employees working across multiple countries, each subject to taxation, tends to be more complex than initially anticipated. It involves navigating diverse tax laws, adhering to local regulations, and addressing intricate social security systems. This complexity can result in a maze of administrative issues, spanning from potential double taxation and legal conflicts to financial penalties. One of the areas often requiring regulation is what is commonly known as the shadow payroll.

What is shadow payroll?  

The shadow payroll serves as a vital mechanism for organizations employing staff internationally. It enables them to adhere to intricate tax regulations across multiple countries simultaneously. But how does this process operate? 

In essence, shadow payroll entails a company maintaining dual payroll records for employees working abroad. In addition to the regular payroll in the home country (referred to as the payroll), distinct records are maintained for the foreign salary. These records are utilized to compute the applicable charges in the foreign location. Subsequently, these charges are integrated into the regular payroll records. 

Is shadow payroll mandatory?

The obligation for shadow payroll depends on various factors, such as the duration of the stay abroad and the rules regarding social security and taxation. The circumstances determine where an employee is socially insured for, for example, unemployment and healthcare. Tax treaties determine in which country wage tax must be paid. We have made an estimate for your situation in our test. Fill out the test and get your answer right away!

The components integral to this process encompass the following: 

• Salary computation: The foreign employee’s salary is converted into the currency of the host country, factoring in local tax laws. Notably, the definition of gross salary might differ from one country to another.  
• Tax deductions: The essential taxes and social contributions are computed and deducted following the regulations of the host country.  
• Reporting: Elaborate payroll records are generated to fulfill local reporting and compliance mandates.  
• Integration: The data from the shadow payroll is harmonized with the regular payroll to ensure a comprehensive overview and accurate disbursement of net pay. 

Download: 6 key considerations for employers in the Netherlands

All your international workforce needs covered 

Dealing with a multifaceted international workforce often requires the expertise of specialists. At Crowe Peak, you’ll find precisely these professionals. Our experts provide comprehensive services in global mobility and payroll management. This includes not just shadow payroll but also split payroll and (international) payroll dashboarding. Furthermore, we offer crucial guidance on labor and employment law, social security, international tax legislation (including wages), and securing residence permits for your staff. Kindly utilize the form below to inform us about your requirements. You can expect a response within one business day.