Companies who have tax equalized expatriates on payroll longer than 183 days may be required to run a “shadow payroll” in the host location to calculate the host tax withholding for the expatriate and pay it to the local government on a regular basis. This calculation is often referred to as a shadow payroll since the company pays these taxes on behalf of expatriate and often the expatriate does not see these calculations. Shadow payrolls typically exist in all host locations that require payroll tax withholding (ex: Germany) and in home locations that tax on worldwide income (ex: United States).
Shadow payroll calculations are often very complex because of data availability, accuracy, inconsistent policies and lack of local payroll expertise. Complexity inherently exists in the application of taxability to the multiple compensation elements by policy type, which will either increase or decrease the taxable income for each expatriate in each jurisdiction. This complexity is compounded by the need to gross-up these calculations alongside the local payroll. Building and maintaining a host taxability grid is one of the best ways to ensure each element is taxed properly at each payroll location. It is also important to incorporate all components of compensation in the shadow payroll, including the balance sheet components and benefits in kind regardless where they are paid.
Best practices related to calculating shadow payrolls include:
- Create a taxability matrix for each country expatriate taxes are required
- Update payrolls monthly with all compensation changes and benefits in kind
- Review data for integrity to ensure the appropriate data is complete and captured accurately
- Review payroll and tax program annually
- Perform consistent and timely compensation accumulation
Not sure your company tax equalizes or what a tax equalization program is? Want to learn more about compensation balance sheets? Have a question on host tax calculations? Contact us today!
Throughout the years, Celergo has supported various organizations including the APA, SHRM, and Multiple Relocation Councils with presentations on various expatriate related topics. We are happy to share that expertise with you.