saving of overall operational costs
of monthly payroll filing on time
reduction in the need for filing amended W2 forms
Client Background
Our client, a Fortune 500 global technology
business, hires thousands of employees across the world to work on client projects in the USA. Each international employee creates a shadow payroll obligation to the USA tax authorities, which companies must address to remain compliant.
These tax obligations are urgent and often complex and when dealing with thousands of employees, can generate thousands of hours in administration.
The need for change
Managing large fluctuations of employee numbers across multiple geographies and entities while simultaneously ensuring accurate, timely payroll and tax processes can be a daunting challenge. It caused a major headache for this client’s global mobility team.
With high stakes shadow payroll deadlines and the inherent difficulty in obtaining real-time data, the very practical temptation
is to create a process based on estimated data and then, with great effort, to perform reconciliation and retroactive corrections
by fiscal year-end.
But the effort does not end there.
There is often a second wave of income tax reporting and corrections lasting well into the new year. Once the estimation process has been set in motion, it is generally regarded as quite difficult to change despite widely-known disadvantages such as a high level of effort, increased compliance risk, and substantial financial costs.
A shadow payroll system based on estimation
For almost a decade, this client’s USA shadow payroll was managed by monthly estimations. The problem with this is filing estimated shadow payroll figures with tax authorities requires reconciliation at year-end.
The earlier estimation-based payments to tax authorities are compared with actual payments to employees to identify over-and under-payments to the authorities. The variances are then used to "true up" the payments to the tax authorities using the assistance of an external tax provider.
This results in challenges requiring high administrative effort:
Late data collection in the home countries led to a monthly estimation process that required time intensive year-end corrections.
Overpayments were difficult to reclaim and this tied-up cash for months.
Difficulties meeting the deadlines for all employees increased the risk of late payment penalties.
Achieving tax compliance required substantial tax provider fees and interest payments.
"Queries from the fiscal authorities passed through many hands, and information was lost with each transfer. It was a nightmare to do all of the reconciliation within two months at the end of the year. We had to collect the data, review the data, send data to the provider, receive data from the provider, send the data to the payroll team, and verify that the payroll results are correct."
Fortune 500 Senior Tax Specialist
The second step: build speed through automation
By 2020, the client had experience working alongside Certino. Using our shadow payroll automaton solution, they established efficient and accurate shadow payroll for a dozen countries - and they were ready to implement these shadow payroll processes on a much wider scale.
This would require a substantial shift in workstream responsibilities, but they were confident they would be successful given their team’s deep shadow payroll experience coupled with the power of our automated solution.
Replacing estimation processes
Capturing real-time data
First, they replaced estimation-based processes with a global data gathering process that would allow real-time data reporting. They worked with us to establish tax positions to create optimised tax payments supported by a detailed compensation analysis.
It is essential that the global team works collaboratively with local payroll teams to create clear, sustainable, responsive processes that minimally impact local payroll operations.
Payroll teams are first and foremost dedicated to meeting employee payment obligations, which can be a continual monthly challenge. Shadow payroll will always represent a secondary objective. Because shadow payroll is reported in arrears, it is altogether too common to fall behind in data gathering as it is prioritised behind traditional payroll.
The global team must both reinforce the strategic importance of high-performing shadow payroll to the company while also taking care to simplify the compensation reporting effort necessary for capturing real-time reporting.
The data used in shadow payroll processes originate in a complicated assortment of payroll, HR information, and assignment tracking systems; even in manually maintained files. In an ideal world, the upstream process dispenses data in their standard output format, and it is the responsibility of the downstream process to map and manipulate the data for use in their processes.
Sometimes downstream systems lack the sophistication necessary to accommodate native format incoming data. The global team is responsible for reviewing the full end-to-end data flow to ensure that it is efficient
and as painless as possible.
And that’s where we come in. Certino's expertise is in the centralised, automated calculation of shadow payroll obligations. To facilitate the end-to-end flow, Certino validates and transforms incoming data from multiple systems into a standardised format used in its shadow payroll calculation engines.
The results are produced in one or more custom output formats per host country to best meet the downstream processing needs of payroll and tax provider teams. As the end-to-end processes become better defined and robust, ever-increasing automation can be introduced to drive efficiencies.
Working in collaboration with existing large accountancy firms
Collaboration is part of our DNA. We delight in engaging with talented professionals to design real-world solutions in real-time. This is foundational to our relationship with all our clients.
This client had a long-term relationship with 'Big 4' accountancy firms to provide a suite of global mobility tax services and some aspects of the shadow payroll process. Certino was introduced not as a replacement for the shadow payroll tax provider services but as a valued and complementary partner with very specific expertise in the automaton of shadow payroll calculations at a global scale.
Certino integrated into a discrete (and traditionally quite problematic) portion of the overall end-to-end shadow payroll process that in turn allowed this client and their tax provider to increase their focus on other activities where they contributed significant value.
Increased processing speed, greater data transparency, value-added specialisation supported by a harmonious, collaborative environment brought this client great success. It’s a win-win scenario for each partner in the shadow payroll process.
Primary benefits of automated shadow payroll
Cost reduction
The legacy process was entirely reliant on the use of monthly estimates which required end-of-year shadow payroll reconciliation supported by an external tax provider. Individualised payroll correction for thousands of employees, with additional follow up in some cases, can be quite expensive.
The new shadow payroll process, supported by our automated calculations, allows for monthly filings using actual data. In the vast majority of cases, the need for year-end payroll reconciliation is eliminated.
A global internal tax team was brought in to handle routine assignment questions from tax authorities and business unit representatives. This modest additional cost was dwarfed by the substantial decrease in year-end payroll reconciliation fees.
Significant time savings
Even the W-2 amendment frequency greatly decreased. Each W-2 amendment carries a penalty; in previous years there might have been more than 500 amended W-2s, yet under the new process there were only three or four amended W-2s
Cost savings
Overall, the new shadow payroll process reduced end-to-end direct costs by approximately 70%.
Secondary benefits of automated shadow payroll
USA team realignment
It is not enough to simply say that the workload decreased dramatically without mentioning what was accomplished with the time savings.
With shadow payroll being centralised globally, the USA mobility team based in other countries regained the time previously spent managing shadow payroll and could provide more value-added services to ongoing operations.
Eliminating overpayments, due to inaccurate estimates, released the payroll team from the tedious and time-intensive adjustment process of deleting payrolls and replacing them with corrected payrolls.
