The process to apply for the Covid-19 Wage Subsidy is pretty straight-forward and the turn around in payment has been very quick. We initially fielded hundreds of queries about the application process and having dealt with these are now receiving queries about how to reconcile the payments. If you use MBP for you bookkeeping, rest assured, your MBP Business Support Administrator or Advisor will deal with all the details of this for you. If you are handling your bookkeeping yourself, we have set up this hand guide to help you out and answer a few of the most common questions we get asked. If you have any queries, please don’t hesitate to get in touch with the team.
What is the COVID-19 Wage Subsidy?
Understanding what the wage subsidy is, helps to inform you how it should be treated in your accounting system and in your tax returns to Inland Revenue.
For employers, the wage subsidy is a lump sum payment that helps you to pay the regular wages and salaries to your employees over the 12 week contracted period you agreed to in the declaration. As it has been defined by the government as exempt income, the income is not declarable and the associated wage and salary expense is not a deductible expense. The easiest way to think about it for employers is that the wage subsidy is a wage expense offset.
For contractors and the self-employed, it is a lump sum payment received to help ease the loss of income for you over the 12 week period outlined in the application declaration. The easiest way to think about it for self-employed people is that it is an income replacement.
Reconciling the COVID-19 Wage Subsidy in Your Accounting System
Reconciling and accounting for the wage subsidy is an simple three step process. First, you’ll need to set up some new Chart of Accounts codes to record the lump sum and the weekly income/ expense offset. Secondly, you’ll need to allocate the lump sum to the right place. Lastly, you’ll need to account for the weekly amount of the subsidy ‘earned’ or used to help you pay wages.
Setting Up New Chart of Account Codes
You’ll need at least two new account codes to nicely keep track of the subsidy and its associated income or wage expense offset. These accounts are:
- Current Liability style account, called something like ‘COVID-19 Wage Subsidy’, No GST. For the lump sum you receive.
- Other Income style account, ‘COVID-19 Subsidy’, No GST. For the declarable income replacement or the wage expense offset.
If you have both regular and shareholder employees, you’ll need a separate ‘other income’ style account to offset the wages of each different class of employee as the expenses are declared in separate line items of the financial statements.
For the self-employed, it’s possible that your Chart of Accounts already has an account called something like ‘Unearned Income’ as a current liability and an account called either ‘Sundry Income’ or ‘Other Income’. You can use these existing accounts if you are not confident with adding new accounts into your accounting system.
Reconciling the Lump Sum Payment Received
The lump sum should be reconciled to the current liability account. This is because you will be using the subsidy over a 12 week period that likely spans two financial years. The part that you have not yet used to help pay your staff or that you have not yet ‘earned’ as other income is a liability you’d otherwise be required to pay back to MSD if you decided to fire all your staff or shut down your self-employment business.
Accounting for the Use of the Wage Subsidy
For employers, you’ll need to journal the amount of the wage subsidy you are using each week to help you pay your staff across from the current liability and into the wage offset account set up as an other income style of account. For example, if your weekly payroll for all staff is $4,675.00, debit the current liability by that amount and credit the other income account by that same amount. You do not need to consume the subsidy evenly over 12 weeks. You simply need to commit to your best efforts to keep all the staff you claimed for employed for at least 12 weeks. That may mean that you can use the subsidy to cover a highly paid pool of staff for 6 weeks or a lower paid pool of staff for 13 or more weeks. It all depends on the make-up of your staff pool and the needs of your business.
For the self employed, you’ll need to set up a recurring journal to allocate the weekly amount of the subsidy that you have ‘earned’ as replacement income. This will just be a simple process of setting up a recurring journal that Debits the current liability account you’ve created and Credits the other income account for the weekly amount of either 585.80 or 350.00 depending on which level of subsidy you claimed. Remember that these journals should have no GST but that the income is taxable to you once it hits that other income account. This is why its important to declare it with these weekly journals rather than in a single lump sum.
This process helps to establish an audit trail that will show any MSD auditor when you used the subsidy and just what you used it for.
Paying Your Staff with the Wage Subsidy
The wage subsidy does not change any employment law or alter your contracts with your staff.
Your staff should be paid as normal, or paid as you have agreed in writing with them to be paid, during the lock-down and beyond. If you need to agree updated terms of employment with your employees, reach out to the team at MBP. Our team of HR advisors can advise you on your options, draft the appropriate documentation and help you to communicate with your employees.
The wage subsidy simply provides you with the cash you need to keep paying your staff normally while your business activity is constrained due to COVID-19. If you wouldn’t change your payroll processes for using an overdraft to pay your employees, you wouldn’t change it for any other form of funding, like the subsidy.
The only time that the COVID-19 Wage Subsidy should be referenced in your payroll system or on your employee’s payslips is if you have no choice but to pay your employees nothing but the amount of the wage subsidy. In circumstances where a business can not afford to pay their staff at all, they are able to claim the subsidy and pay their staff by passing on the value of the subsidy and nothing more. In this instance, the employee is not being paid regular earnings and so adjustments to payroll will need to be made. Many cloud-based payroll systems have rolled out new default pay items to their systems to make this process easier. However, some have done a better job of it than others. Please double check everything and if you are in doubt, reach out to the team at MBP for some help.
Potential Implications of Taking Short-cuts
A lot of people doing their own bookkeeping (and even some lazy bookkeepers) may be tempted to take shortcuts and not reconcile and account for the subsidy correctly. This may seem harmless at first but can have a lot of unintended consequences.
For employers, receiving the lump sum in a single tax year when the subsidy period covers two tax years will throw off your payroll reconciliation. It will artificially lower your wage expense in one year and inflate your declared out of pocket cost in another. This has potential implications for your tax position as well as your ability to get financing in future.
For the self-employed, declaring the lump sum in a single tax year instead of spreading it over the full 12 week time-frame may inflate your taxable earning more than necessary in one year. This could have a considerable impact on things like Working for Families Tax Credits. So there is a chance that by incorrectly declaring the subsidy you could be losing thousands in additional tax credits.
Is the COVID-19 Wage Subsidy Taxable Income?
There is a lot of talk about the COVID-19 Wage Subsidy being non-taxable. However, this can be confusing and misleading unless you understand the subtle differences between things like non-taxable, excluded and exempt income.
GST on the Wage Subsidy
The COVID-19 Wage Subsidy is exempt from GST.
Make sure there is no GST on any of the codes you’ve created to record the subsidy.
Income Tax on the Wage Subsidy
The COVID-19 Wage subsidy is taxable in the hand of the end recipient.
For employers, this means that the subsidy is taxable in the hand of the employees you pay using the subsidy funding (through their regular PAYE deductions).
For the self-employed, as you are the end recipient, the subsidy is declarable as income for you and will inflate your taxable profit. Ensuring that you properly follow the reconciliation process above will make sure you don’t over declare your income in any tax year covered by the subsidy.
This advice is general in nature and should not be relied on as a recommendation. Every situation is unique and requires tailored advice. Get in touch for a free consultation by clicking here, emailing [email protected] or call us free on 0800 86 85 86.