Illuminating the Mystery of Shadow Payroll


Before an employer sends an employee overseas for a long term assignment, the employer must decide whether the employee will be paid from the home or host payroll, or through some combination of the two, Michele Honomichl, founder, executive chairman, and chief strategy officer of Celergo, said May 18. 

This structure will help determine whether the payroll in the employee’s home location or the payroll in the host location where the employee is assigned will be the shadow payroll, or the method used to ensure that employees overseas on international assignments are compliance with tax reporting and payment obligations in multiple jurisdictions, Honomichl said at the American Payroll Association's 2018 Congress in National Harbor, Md.

Running payroll in the home country allows employees to remain on home-country benefit plans, provides funds to meet home-country obligations such as mortgages or debt, facilitates ongoing enrollment in the home country’s social security system, and helps employees who are parents with school-aged children maintain in-state tuition, Honomichl said.

Processing payroll in an employee’s host country can provide employees with funds to meet host country living obligations and can encourage participation in a host country social security system since liabilities can be easily calculated. 

However, host-country payroll may complicate participation in home-country employee benefit plans such as retirement, hinder ongoing participation in home-country social security systems, and requireworkers to switch payrolls for each work assignment in a different country. 

Split payroll, where payroll in the host country and the home country each deliver a portion of employees’ pay into designated bank accounts, may address some of these issues by enabling employees to use the pay for host-country living obligations and obligations in their home country. Split-country payroll also may reduce the risk of exchange rate exposure.

Calculating taxes at employees’ home location and running a shadow payroll simultaneously in their host country is the most common method for operating a shadow payroll, Honomichl said.

Host tax programs include tax equalization where the employer pays the host tax and gross-up is needed, employees are treated like a local for local payroll and pays host taxes so no gross-up is needed, or the employee is on a home payroll but pays host taxes through a deduction on their home payroll so no gross-up is needed, Honomichl said. 

Tax equalization is a common technique used by U.S. employers to show how much tax would be paid at home if an employee was not on assignment in a host country. 

There is no one-size-fits-all approach to the taxability of income earned by employees assigned to a host location, Honomichl said.