As business has become globalized, the number of employees working outside their home countries has grown. Each nation has its own regulations governing the compensation and taxation of employees. Shadow payrolls are calculated when employers need to insure compliance with the rules in both the home and host countries.
Legal Compliance and Shadow Payrolls
Suppose a U.S. firm assigns an employee to work and reside in a foreign country. The employee is paid in the host country and her wages, benefits and payroll taxes are handled under the laws of that country. However, United States tax law requires that the employer calculate and remit federal, state and local payroll taxes. When expatriate employees are assigned and paid in this manner, employers must calculate a shadow payroll to determine taxes due. The reverse situation occurs when a foreign national works and is paid in the United States but is also subject to tax requirements in his home country. In this case, shadow payroll determines his home country taxes. Shadow payrolls may also be needed when an employee resides in a host country and is paid from the home country, but is still subject to the host country’s tax laws.