I have had some questions from my customers about the accounting treatment of the COVID-19 Wages Subsidy (and for that matter any further subsidies).
Many of you know that I consider myself an accounting cripple, so I asked my accountant, Sarah of Dcipher Accounts to provide some advice that I could pass on to you.
The IRD have advised that the Wage Subsidy is:
- Not subject to GST
- Not taxable income to the employing company
- Not a tax deductible expense when paid by the company to employees
- Taxable income for the employee
All of this means you need to be careful when you record the transactions in your accounting system.
Here is a simple approach you could take.
Setup 3 new accounts in your accounting system:
- Liability account – COVID-19 Wage Subsidy
- Revenue account – COVID-19 Wage Subsidy. This account will be non-taxable and zero GST
- Expense account – COVID-19 Wage Subsidy. This account will be non-deductible
When the Wages Subsidy comes in to your bank account:
- Record the payment in your Liability account (A)
- Consider opening a new bank account and transferring the funds there so that you don’t accidentally use it for something else.
Each pay period when you pay your employees:
- Debit the liability account (A) and credit the revenue account (B) for the proportion of the Wage Subsidy used.
1/12 for weekly
2/12 for fortnightly
12/52 for monthly
6/52 for bi-monthly
Remember that there will be awkward amounts for monthly and bi-monthly payrolls.
- Debit the expense account (C) and credit your wage expense account(s) for the proportion of the Wage Subsidy used.
- If you set up a separate Wage Subsidy bank account, transfer the amount in 1 from your Wage Subsidy bank account to your working bank account.
I hope this guide will help you either do the accounting for the Wage Subsidy yourself, or understand how your accountant handled it.