Michele Honomichl Executive Chairman amp Chief Strategy Officer Celergo Global Payroll California Payroll Conference September 11 and 12 2014 Introductions What is a Shadow Payroll When do I need a Shadow Payroll ID: 277984
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Shadow PayrollMichele HonomichlExecutive Chairman & Chief Strategy OfficerCelergo Global Payroll
California Payroll Conference
September 11 and 12, 2014Slide2
IntroductionsWhat is a Shadow Payroll?When do I need a Shadow Payroll?
What is included in a Shadow Payroll calculation?What is a Tax Matrix?Tax Calculation Examples
How do I manage a Shadow Payroll?
Agenda
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Expatriate PayrollsHost Shadow PayrollHome Shadow Payroll
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What Is A Shadow Payroll?Slide4
Expatriate Payrolls
Consists of Multiple ComponentsCompensation Balance SheetTax Equalization
Benefits In KindSplit Payments
Calculation of Taxes at the Host
Calculation of Taxes at the Home (Countries that tax on worldwide income)
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Host Shadow Payroll
Calculation of taxes at Host LocationOften referred to as “Shadow Payroll”Typically Employer pays this Tax on behalf of the Employee
Typically Grossed-up or Rolled Over
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Home Shadow Payroll
Typically occurs in Countries with WW Income RequirementsUnited StatesSwitzerland
South AfricaA Few Others
Host
Taxes can
also be included in Home Payroll on an Off-Cycle Basis
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Types of Host Tax Programs
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Employee is on Tax Equalization and the Employer pays the Host Tax (Gross-up needed)
Employee is treated like a local, on local payroll and pays host tax (No gross-up needed)
Employee is on a home payroll but pays host taxes via a “Host Tax Deduction” on home payroll (No gross-up needed)Slide8
Home Shadow Payroll
Includes:Full Compensation Package (Regardless where p
aid)Benefits In Kind
Host Taxes
Calculates:
Social Insurances
US: Medicare, SS, sometimes State & Federal
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Long Term Expatriate
Local Rules On Foreign Workers
When Do I Need A Shadow Payroll?
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Long Term ExpatriateMost Expatriates on Long Term Assignment will need Host Tax Calculations if Withholding is required in Country
Most Countries Require Withholding – Some do not (Hong Kong, & France, etc.)
Long-Term is often defined from a Tax Perspective as Greater Than 183
Days
Some countries Calculate 183 days based on Jan1 to Dec31
Others count from start date in country
Some Countries Require Calculations at 90 or Less Days
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Foreign WorkersSome Countries Require Host Tax Calculations Even If Employee Is Not
An ExpatBased on Work Performed
Determined by Local Country RulesRequired if Work is Billed to Local Entity
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Compliance
Host Tax Payrolls (Withholding) are often required by Host Locations
May be dependent on Visa TypeMay be required to maintain Drilling or
Business
PermitsNeed To calculate to not Incur Penalties
May be Audited more regularly
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Withholding Submissions
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Expatriate Host Taxes Payments can be tricky:Modified Scheme –
Expat Taxes submitted separately from Local Taxes under same Company Tax ID (Example: UK)
One Company Tax Id:
Expat Taxes must be submitted with Local Taxes (Example: Germany)
By Individual:
Expat Taxes are remitted for each individual (Example: Spain)Slide14
Compensation PackageBenefits In Kind Taxes
What Is Included In A Shadow Calculation?
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Compensation PackageCompensation Package Includes:
SalaryExpatriate Allowances (COLA, Housing Allowance, Car Allowance, Foreign Service Premiums)
Expatriate Deductions (Hypo Taxes, Housing Norm, Transportation Norm, etc.)Home Country Deductions (Pension, Insurance, etc.)
All Included Regardless Where
Paid
!
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Benefits In Kind
Determine Taxability FirstRelocation Provider PaymentsRent, Storage, Property Mgmt., Training, etc.
Usually Sent To Company Each Month/Cycle
Internal Payments by Accounts Payable
Gathered from each Host/Home Location
Usually every Cycle or Quarterly
Typically Need To Be Grossed-up
Often Processed Off-cycle
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Taxes
If on Tax Equalization, Host Taxes are Taxable at the Home Location if the home location taxes Worldwide Income
Taxes include Income and maybe Social (
Totalization
Agreements)
US Taxes on Worldwide
Income
Income Is Reduced by the Hypo Tax and then Increased by the Host Tax
The Differential Between the Home and Host Taxes is the Company’s Expense
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Host Tax CalculationsExample
What Is A Tax Matrix?Slide19
Matrix For Host Tax Calculation
Lists All Elements Paid to or On Behalf of the ExpatriateCompensation: Salary, Cola, Transportation Allowances, etc.
Benefits in Kind: Rent, Property Management, Storage, etc.
Relocation Allowances: Cultural Training, Moving Expenses
Review Taxability for Each Element
Best Practices:
Tax Return Provider in that Country Approve the Matrix and Review Annually
Provide Payroll with Documentation for Host Tax Calculation
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Tax Matrix ExampleNorway: Long Term Expatriates
Compensation Elements
Taxability for Income Tax and Social Security TaxExample
Amount to Gross-Up
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UK to GermanyUS to Germany
US to Germany (With Off Cycle in US)
Tax Calculation ExamplesSlide22
Example Calculation 1
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Long-term ExpatriateHome: United Kingdom
Host: Germany
Split DeliverySlide23
Example Calculation 2
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Long-term ExpatriateHome: United States
Host: Germany
Split Payroll
Separate Cash versus Tax MechanismSlide24
Example Calculation 3
24Long-term Expatriate
Home: United States
Host: Germany
100% Home Delivery of Funds
Use of Off Cycle for Grossing-Up Benefits in Kind and Host TaxesSlide25
ChangesMemo Updates
ConsistencyAuditing
How Do I Manage A Shadow Payroll?Slide26
ChangesEnsure changes to Comp Sheet are included at Host and Home Payrolls
Coordinate Benefit Update Timing with Updating the HostConfirm Changes were Implemented at Host by Reviewing Pay SlipsSlide27
Benefit In Kind Updates
Set-up a Calendar for Benefit In Kind UpdatesReview Data to Ensure Proper Exchange Rate is UtilizedConfirm Host Payroll has Properly Included Benefits In Kind via Pay Slips
Ensure Data is Captured in Correct Tax Year
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Consistency
Set-up Payroll Calendar for Host PayrollsProcessing More Often Is BetterProvide Same Format Each Month to Host Locations
Request Same Format for Collection of AP and Relocation Items
Training Is Essential To Ensure Proper Tax Compliance
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AuditingReview Pay Slips or Reports from Each Cycle to Ensure Changes were Processed
Watch Trends for Missing Data Check for Taxability and Gross-up
Refine Process After Each Tax Year
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Conclusion
Shadow Payrolls Are NecessaryConsistency Is Very ImportantCompliance Is Based On Accurate and Timely Data Loads
Host Calculations are More of an Art Than A Science
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Thank you for your attentionQuestions? Please feel free to contact Michele Honomichl at mhonomichl@celergo.com