What is Shadow Payroll?
Shadow Payroll is a method of calculation and reporting of social security payments and other taxes to the relevant authorities of the country where an expatriate employee goes for a long or short-term project. Meanwhile, the native country or home country is actually from where the employee will receive his wages.
It reveals that the shadow payroll is not actually used to pay workers or expatriate workers, however, it is only a technique that enables the employer to fulfill taxation and reporting requirements by simply shadowing the payroll reports of the home country of the employee. The need for shadow payroll is increasing day by day and businesses are implementing shadow payroll to facilitate overseas projects and manage overseas employee costs. Just like general payroll, shadow payroll can also be outsourced with payroll outsourcing in UAE.
How Businesses Manage Employee Costs Through Shadow Payroll
Shadow payroll is the best option for employers to manage employee costs while the employees are working on overseas projects. Without employing shadow payroll the employee costs can certainly double for the employer which will be considered a drawback of shadow payroll.
Following is how businesses incorporate host country shadow payroll or home country shadow payroll for the purpose of managing employee costs;
1. Employers Confirm The Home Country Of The Workers
Note that you must first check the location of your overseas workers. There is something incorrect if they are situated in your native region. The workers should be located in any of the foreign branches of your business, and if so, that region must be used as the home country of your worker. Assume your headquarters are in the United Kingdom which is your base country. You do, meanwhile, have a subsidiary and a properly established office in Australia. Your workers located in Australia are present on the record of the Australia payroll and you intend to transfer any one of Australia employees for a 12 months project to UAE. The worker’s home country must be adjusted to Australia. It will then be left to the Australia team to put that specific worker on the payroll of the home country to be a jointer. Consequently, the Australian subsidiary and the worker would be needed to remain in compliance with the regulations of both locations i.e, UAE and Australia during the stay of the worker in the UAE.
2. Employers Process Home Country Payroll With All Variables
Following that, ensure that your payroll department executes payroll in Australia with every variable of pay as usual. In simple terms, you will determine your insurance, social security, taxes, and other significant obligations such as benefits, retirements, and so on. This step is critical in ensuring your compliance in the native jurisdiction. Although your worker is not performing a job in the home country, you, as an employer, are still responsible for that worker if they are present on the payroll record of the home country.
3. Employers Assemble Payroll Reports
Furthermore, with respect to how payroll is managed in your organization, either with an in-house payroll department or any external payroll provider i,e, payroll outsourcing UAE, it is vital for you to keep the necessary documentation with you, so the payroll managers are mindful of the workers working abroad. Note that UAE will not compensate your worker in any way, therefore you must keep sending the payroll records of overseas workers to whatever agency you entrust to compensate your employees.
4. Employers Consider The Overseas Employee A Starter
At this point, things get a little complicated. After you successfully complete payroll in Australia, you will need to put your foreign worker on the payroll of UAE as just a starter. The worker would effectively be enrolled into the payroll system of UAE with this title. To avoid having your worker taxed more than once on their wages, it would depend on the Australian subsidiary or payroll agency to implement a net deduction to decrease the taxable amounts to 0. All variables, including possible incentives, benefits, and commissions in addition to salary should be reported on each payroll including host country payroll and home country payroll. Remember, you must file for any prospective schemes for the netting of foreign tax to remove the tax obligations of the host country as well as other payments that the employee may be required to make.
5. Employer Considers Tax Equalization
Lastly, you will have to go through a procedure known as tax equalization. Your request for netting of foreign tax scheme would almost certainly be approved, and the worker will not need to stress over hypothetical tax. Tax equalization basically permits the worker’s home jurisdiction to manage the taxation requirements that the worker will otherwise be expected to submit to the foreign jurisdiction for income earned during operating in that jurisdiction. This last stage ensures that your worker’s tax responsibilities when abroad have been met. Ultimately, they must only notice tax obligations in the native jurisdiction rather than UAE.
6. Employers Often Outsource Shadow Payroll
Employers who do not want to spend their resources on the above-mentioned procedures or do not have enough time to perform all such obligations simply outsource their shadow payroll accounting. It depends on the needs of the business, however, most businesses consider outsourcing shadow payroll processes a need. Outsourcing facilitates foreign projects because the employer or employee does not have to worry about tax obligations and filing requirements. The outsourced firm does this all effectively.
Choose The Best Services
In order to manage employee costs so that the employer does not have to pay the employees working on the overseas projects twice and to reduce tax costs on them, employers prefer to implement shadow payroll. It is one of the factors that speed up the process of expansion for businesses. However, successful businesses are the ones that understand the need for outsourcing business functions such as shadow payroll. If your business is in need of outsourcing shadow payroll then you landed on the right page. Payroll Middle East provides excellent payroll outsourcing services to help your business grow. You can completely rely on our efficient, reliable, and accurate services.
Anu Thomas has over 5 years of Payroll experience under her belt and deals with many aspects of Payroll management. She continues to develop her knowledge of the latest payroll legislation to best support clients.