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The importance of shadow payroll in the Netherlands 

Is shadow payroll mandatory in your situation?

Managing payroll for international employees comes with significant compliance risks. If your company fails to implement shadow payroll where required, you could face tax audits, financial penalties and conflicts with your employees. Without proper payroll administration, your employees will be at risk and required to file their own tax returns to correct this – often without realizing it. This can result in unexpected tax bills, additional payments and serious turmoil among your international workforce. Since corrections may be required with retroactive effect for previous years, this can have a serious financial impact if not addressed immediately.  

Shadow payroll explained

Shadow payroll is a process where companies maintain parallel payroll records for employees working internationally. In addition to the regular payroll in the home country, a separate “shadow” payroll is run in the host country to calculate and report the applicable taxes. These foreign payroll records are integrated into the regular payroll without affecting the employee’s net salary, ensuring compliance with local tax laws across multiple jurisdictions.

Liability risks for employers and third parties   

Payroll errors do not only affect your business. They can also impact third parties, such as payroll intermediaries, subcontractors or your clients, who may be held accountable under sequential liability. If shadow payroll is not correctly implemented, Dutch tax authorities may hold not only your company but also these partners financially liable. This means that mistakes in your payroll administration could affect multiple parties in your supply chain.  Another major concern is double taxation. Without a compliant shadow payroll setup, employees may be taxed in both the Netherlands and their home country, leading to unnecessary financial strain and penalties ranging from 25% to 50% of unpaid taxes in the Netherlands.   

The risks of mismanaging international payroll   

Failing to comply with shadow payroll requirements can result in:   

  • Tax audits and penalties: Dutch authorities may impose back taxes and fines, often with significant interest charges.   
  • Employee dissatisfaction and disputes: International employees may face unexpected tax bills long after the objection period has passed.   
  • Sequential liability (ketenaansprakelijkheid): Payroll intermediaries and subcontractors, particularly in the construction industry, may also be held financially responsible.   
  • Double taxation risks: Employees may end up paying tax both in the Netherlands and their home country, potentially triggering additional penalties. 
  • Legal and reputational consequences: Non-compliance can result in violations of tax and social security regulations, leading to further sanctions and reputational damage.   

By proactively ensuring shadow payroll compliance, you protect your business, your employees and your business partners from these risks.   

Is shadow payroll mandatory for your company?  

Whether your company needs to implement shadow payroll depends on several factors, including the length of an employee’s stay and applicable social security rules. By using this tool, you can instantly check within minutes whether your payroll setup is compliant. Start now!

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Any other questions regarding your international staff? We are here to assist with expertise in over 150 countries, covering international payroll, shadow splits and everything you need for managing your global workforce. Let us know how we can help you by filling out our contact form. We will get back to you within one day.