What Is A Shadow Payroll? - California Payroll Conference
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Transcript What Is A Shadow Payroll? - California Payroll Conference
California Payroll
Conference
Shadow Payroll
Michele Honomichl
Executive Chairman & Chief Strategy Officer
Celergo Global Payroll
September 11 and 12, 2014
Agenda
Introductions
What 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?
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What Is A Shadow Payroll?
Expatriate Payrolls
Host Shadow Payroll
Home Shadow Payroll
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Expatriate Payrolls
Consists of Multiple Components
Compensation Balance Sheet
Tax Equalization
Benefits In Kind
Split 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 Location
Often 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 Requirements
United States
Switzerland
South Africa
A 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
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)
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Home Shadow Payroll
Includes:
Full Compensation Package (Regardless where paid)
Benefits In Kind
Host Taxes
Calculates:
Social Insurances
US: Medicare, SS, sometimes State & Federal
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When Do I Need A Shadow Payroll?
Long Term Expatriate
Local Rules On Foreign Workers
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Long Term Expatriate
Most 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 Workers
Some Countries Require Host Tax Calculations Even If
Employee Is Not An Expat
Based on Work Performed
Determined by Local Country Rules
Required 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 Type
May be required to maintain Drilling or Business Permits
Need To calculate to not Incur Penalties
May be Audited more regularly
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Withholding Submissions
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)
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What Is Included In A Shadow
Calculation?
Compensation Package
Benefits In Kind Taxes
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Compensation Package
Compensation Package Includes:
Salary
Expatriate 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 First
Relocation Provider Payments
Rent, 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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What Is A Tax Matrix?
Host Tax Calculations
Example
Matrix For Host Tax Calculation
Lists All Elements Paid to or On Behalf of the Expatriate
Compensation: 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 Example
Norway: Long Term Expatriates
Compensation Elements
Taxability for Income Tax and Social Security Tax
Example
Amount to Gross-Up
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Tax Calculation Examples
UK to Germany
US to Germany
US to Germany (With Off Cycle in US)
Example Calculation 1
Long-term Expatriate
Home: United Kingdom
Host: Germany
Split Delivery
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Example Calculation 2
Long-term Expatriate
Home: United States
Host: Germany
Split Payroll
Separate Cash versus Tax Mechanism
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Example Calculation 3
Long-term Expatriate
Home: United States
Host: Germany
100% Home Delivery of Funds
Use of Off Cycle for Grossing-Up Benefits in Kind and
Host Taxes
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How Do I Manage A Shadow
Payroll?
Changes
Memo Updates
Consistency
Auditing
Changes
Ensure changes to Comp Sheet are included at Host and
Home Payrolls
Coordinate Benefit Update Timing with Updating the Host
Confirm Changes were Implemented at Host by Reviewing
Pay Slips
Benefit In Kind Updates
Set-up a Calendar for Benefit In Kind Updates
Review Data to Ensure Proper Exchange Rate is Utilized
Confirm 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 Payrolls
Processing More Often Is Better
Provide 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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Auditing
Review 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 Necessary
Consistency Is Very Important
Compliance 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 attention
Questions? Please feel free to contact Michele Honomichl at [email protected]