Split Payroll Definition

Understanding Split Payroll: A Guide for International Employers

In the realm of international assignments, managing payroll becomes a nuanced endeavor, with factors like currency exchange rates, tax regulations, and employee preferences all coming into play. One method that has emerged as a solution to these complexities is split payroll. But what exactly is split payroll, and how does it work?

What Is Split Payroll?

Split payroll is a method of compensating employees who are on international assignments by dividing their pay between the local currency of the host country and the currency of their home country. This approach serves multiple purposes, primarily aiming to mitigate the impact of currency fluctuations on an employee's earnings. By allocating a portion of the salary in the home country's currency and another portion in the host country's currency, split payroll shields employees from the need to constantly exchange money and the risks associated with fluctuating exchange rates.

Key Takeaways:

• Split payroll involves dividing an expatriate worker's salary between their home country currency and the currency of the country where they are working.
• It helps minimize the effects of currency fluctuations, shifting the exchange rate risk from the employee to the employer.
• Split payroll facilitates compliance with tax withholding requirements and enables participation in retirement plans while working abroad.

How Does Split Payroll Work?

Beyond its role in managing currency risks, split payroll simplifies the task of adhering to tax withholding regulations in both the home and host countries. Additionally, it ensures that employees can maintain involvement in their company's retirement schemes even during their international tenure. Moreover, split payroll streamlines compliance with local labor laws and facilitates the smooth transfer of funds across borders.

Split Payroll in Practice

In practice, split payroll often involves using the host country's currency for daily expenses like rent, groceries, and transportation, while the home country's currency is allocated for savings and expenses outside the host country. This strategy, commonly adopted by European firms for their expatriate workforce, reflects a tailored approach to international compensation. In contrast, U.S. companies, as revealed by consultancy Mercer, tend to favor paying expatriate employees in the local currency of the host country.

Despite its advantages, split payroll may not be suitable for regions with volatile currencies. In such cases, it is prudent to compensate expatriate workers in a more stable currency, either their home currency or an alternative option.

Special Considerations for Split Payroll

While split payroll offers numerous benefits for international employers and employees alike, it's essential to consider the currency stability of the countries involved. In regions with unpredictable currency fluctuations, such as certain parts of Eastern Europe, Africa, and Latin America, alternative compensation methods may be more appropriate.