A split payroll is a method companies often use to pay any employees who are working in a foreign country. The main feature of this type of pay structure is that the employee receives part of his or her pay in the currency of the home country. The rest of each paycheck is paid in the currency of the country where the employee currently resides and is working.
There are several reasons for using a split payroll to pay employees. One of the main benefits of this type of system is that the employee is not totally at the mercy of the constant fluctuations of the exchange rate. Since the relative value of currencies typically changes frequently, any employee who is paid entirely in only one currency can find it impossible to predict what a paycheck will be worth at the time it is received. Using a split payroll insures that the person always knows exactly how much will be paid in local currency and how much will be paid in the currency of the home country. The potential costs related to exchanging currency are also eliminated.
Additionally, the employer also benefits from using a split payroll because it simplifies other payroll accounting functions, such as tax withholding. Once the initial determination is made as to how much of the split is to be in the home county’s currency and how much in the host country’s currency, deductions are usually much easier. Appropriate home country taxes are withheld from that part of the pay, and host country taxes are withheld from those funds. This system avoids the need for additional calculations involving the current exchange rate every time an employee is paid.
A third very important feature of this system is that it allows the business in the home country to be in compliance with transfer limits imposed by certain countries. There are regulations in some countries regarding the amount of money being transferred out of the country. By providing employees with funds in their home countries as well as locally, both employers and employees typically are able to comply with such laws.
There are other systems in use as well, in addition to the split payroll. A company may decide to provide only home-based pay, paying all employees only with the currency of the home country. They may also opt to use only host-based pay, meaning that employees only receive the currency of the host country as pay. The final decision as to which payment system to use depends on such factors as what countries are involved, how many employees are being paid, and how long the employees will be working in the host country.