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 incometo the employing company
Not a tax deductible expensewhen 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.