New to shadow payroll? Start with our complete guide to shadow payroll, which covers what it is, what to check first and how to get the numbers right. This article looks at one question in more detail: when do you actually need one?
More and more companies send people to work abroad, whether to support projects, win new business or give employees the flexibility they ask for. Whenever someone works in another country but stays on their home contract and payroll, a shadow payroll may be needed.
This article runs through the situations where that requirement usually comes up.
A quick recap
A shadow payroll reports an employee's pay in the country where they work, even though they're paid through their home payroll. It lets the employer work out, pay and report the right local tax and social security, without paying the employee twice.
The host entity or payroll provider reports everything the employee receives: salary, benefits, allowances, relocation costs and anything paid locally. Home amounts are converted into the local currency, local tax rules and reliefs are applied, and a tax gross-up is worked out where the employee is guaranteed a net salary.
For the full explanation, see what is shadow payroll.
Why it matters
The challenge is rarely the tax rules themselves. It's getting accurate data from several sources to the right payroll on time. Gaps in that data are the most common cause of errors, and errors lead to overpaid or underpaid employment tax, corrections and extra scrutiny from tax authorities.
That's why many companies are putting a clear shadow payroll process in place, one that supports their assignment policies and the reporting rules in each country where employees work.
1. Long-term assignments
Long-term assignees usually stay on a home contract for two to three years. Many keep home social security and benefits, receive extra allowances and have a guaranteed net salary.
The full package, plus any tax gross-up (and sometimes host social security), has to be reported through the host payroll. A shadow payroll is almost always needed here. The priority is making sure the host payroll gets the correct taxable income every month.
2. Short-term assignments
Short-term assignments can be harder to get right, because the employee often has income that's taxable in both countries.
If a tax treaty doesn't remove the host country requirement, the employee may keep paying tax at home while the employer also meets the host liability, so the employee isn't left with a cash flow problem. A shadow payroll is needed to manage this and any tax protection policy in place.
3. Project workers
Groups sent to deliver a specific project, such as an engineering or IT rollout, may need to follow host payroll rules. It can be harder to work out, because the group may include contractors, service centre staff or temporary employees, and factors like who sponsored the work permit can matter.
A requirement is more likely if the host company bears the costs, or if the host country has an economic employer rule. A clear policy on who covers the extra tax and social security keeps project costings accurate. Review each case early, ideally when you're bidding for the work.
4. Digital nomads
Some employees move between several countries in a year and aren't resident anywhere in particular. Tax treaties generally won't help them, so they may be taxable on the days worked in each country, with a payroll requirement in each one. Local rules and the number of days spent drive the reporting.
Some companies use a global employment company for this group. That's a complex area, so take advice before setting one up.
5. Short-term business travellers
These are employees who travel as part of their job, often in regional or global roles. Many countries have tightened their rules on time spent and duties performed, so liabilities can now arise where none existed before. Sweden's economic employer rule, introduced in January 2021, is one example.
Business travellers often sit outside the mobility team, which makes them hard to track. Put a process in place to review immigration, social security and tax on an ongoing basis, at least for key travel corridors and senior staff.
6. Remote working abroad
More employees now want to work from another country, part-time or full-time. Many companies have introduced policies to allow it, but it can create a tax liability for the employee where they're working, as well as issues for the company.
A shadow payroll may be needed if the employee becomes resident in the host country while still being paid from home. Even if the employee is responsible for the extra tax, the employer needs a clear way to withhold the right amount. If costs stay in the home country, there may also be a reporting requirement there.
7. Virtual assignments
This is remote working in reverse. The employee stays at home but takes on duties for another country. They're still paid at home, but the host duties, and any recharging of their costs, can create payroll and company obligations in the host country.
8. Commuters
Cross-border commuters, such as frontier workers travelling daily between France and Switzerland, often have special agreements in place. If they start working more from home, check whether that breaks the agreement's conditions and creates a tax liability or reporting requirement.
Where no agreement exists, for example between the UK and Switzerland, check whether the employer has a filing requirement and whether a payroll or extra reporting is needed.
Final thoughts
Keeping a mobile workforce compliant has always been hard. Flexible working, new government rules and changing reliefs all add to it. Knowing where your people are working, and what each situation triggers, is the first step.
How Certino helps
Certino calculates your hypo tax, gross-ups and shadow payroll figures on one platform, using country tax engines built for shadow payroll. It shows the workings for every number and sends payroll-ready figures to your payroll provider.
You can run it yourself on the Certino platform, or let our specialists run it for you with our managed shadow payroll service.
Book a demo to see how it works.
