In today’s ever-increasingly global economy, many U.S. corporations have employees working overseas. While this can provide many benefits, it also creates a very specific payroll tax challenge. Not only do you need to abide by federal, state, and local tax codes, but you must also understand payroll tax compliance on an international level. The way many organizations manage this is through shadow payrolls—records that “shadow” or mirror the compensation and benefits received by American workers in their host country for the purpose of calculating, reporting, and remitting taxes.
Payroll tax expert Dayna Reum asserts that shadow payrolls are a confusing and complex issue. In her audio conference for AudioSolutionz, “Best Practices & Pitfalls of Shadow Payrolls for Expatriate Employees,” Reum explains why it’s worth your time to figure out if your organization needs a shadow payroll, and she also outlines how to put one into place.
Challenges From Abroad
Sending employees overseas adds another layer to your already complex payroll compliance challenge. Not only are you responsible to uphold the tax laws of your home country, but you need to be fluent and comply with the host country’s tax code as well. Before you decide to implement a shadow payroll for your overseas employees, you must assess the risks.
In Shadow Payrolls For Non-Resident Employees, ShieldGeo outlines a number of challenges to shadow payroll, such as:
- Foreign exchange issues for the employee;
- Double taxation concerns;
- Treatment of salary allowances for relocation, housing, and transportation;
- Employee mobility and travel between several locations;
- The possibility of triggering ‘permanent establishment’ via the employee’s business activity, even where the non-resident employer does not have a local legal entity; and
- The necessity of complying with additional rules associated with foreign national employees, such as company registration, corporate taxes, employment contracts, and immigration requirements.
ShieldGo also suggests caution when proceeding with shadow payroll for mobile or temporary workers who aren’t in full compliance with immigration rules, which they say is a common practice in some markets.
Best Practices & Success Strategies
After carefully evaluating if shadow payroll will suit your needs, you need to put a plan in place. On The Forum For Expatriate Management, Chris Pardo, GMS-T offers a few best practices for running shadow payrolls:
- Consistently collect and record compensation so that information is up-to-date.
- Make sure that you know and document which compensation elements are taxable for each country.
- Maintain a global payroll processing calendar to ensure you meet the deadlines.
- Update payrolls monthly, with all compensation changes and benefits-in-kind.
- Thoroughly audit your data for integrity to ensure the appropriate data is complete and captured accurately.
- Review your payroll and tax program annually for enhancement.
There are so many layers to shadow payroll, and the risk of noncompliance is daunting. As you seek to get it right, Barbara Hodgdon from LexiconRelocation.com outlines key success factors in global compliance when it comes to shadow payroll that you should look for:
- Strong communications between the home and host countries;
- Identifying raw compensation data (i.e. costs or data needed to compute a benefit for country-specific reporting);
- Timely collection and sharing of compensation data between home and host countries to facilitate wage reporting and tax withholding requirements in the appropriate country;
- Reconciling total compensation data exchanged each period; and
- Reviewing for reasonableness and accuracy (to resolve discrepancies).
Shine A Light On Shadow Payroll
As you begin to implement shadow payroll, you’ll find there’s a lot to learn. Becoming fluent in a whole new lingo that includes terms such as split pay, hypothetical tax, tax equalization, and home-versus-host-country payroll is an education in itself! You also need to know how to implement and maintain a shadow record, understand what it must include, and know how to account for tax consequences. And of course, the Internal Revenue Service (IRS) has their own requirements and tax policy as they relate to expatriate payroll reporting.
Equipped with nearly two decades of experience in the payroll field, Reum will teach you how to determine what to calculate, what to report, and what to remit—and when. If you have U.S. workers overseas, or think you might in the near future, this class is for you.