Many self-employed people make use of accounting software to assist with:
- Accurately recording income and expenses during the financial year
- Preparation of GST Returns
- Monitoring Business Performance
- Assisting with end of year tax return preparation
This article aims to provide guidance around how the COVID-19 Wage Subsidy can be practically recorded in your accounting system.
If you have never done journals in Xero before, or set up new Chart of Account codes, then we recommend you contact your local BDO adviser before going through this Case Study. It is vital you learn how to use these functions correctly (before entering any raw information into Xero), and your local advisor will be able to provide you with any training you require.
This article will focus on how to do this in Xero, but this process is also applicable to other software providers. Please contact your local BDO adviser if you need assistance recording the wage subsidy in another software.
Joe Smith – Sole Trader of Joe’s Handyman Services North Canterbury
Before reading the below, please ensure you have understood the Tax Treatment section of this article, as this addresses the core legislation which underpins how the wage subsidy is returned in the hands of a self-employed person.
Joe will create two new account codes in Xero (You can use whichever naming convention or Chart of Account codes suits your business and software).
- Current Liability (No GST) – COVID-19 Wage Subsidy Received in Advance
- Other Income (No GST) – COVID-19 Wage Subsidy Income
Reconcile the physical receipt of the cash (in your live bank feed) against the liability account code.
You will need to release the subsidy to the income account code, in line with when the income would ordinary have been earned. You can create a journal (or repeating journal) in Xero to record this.
For most self-employed people, this will be in 12 even amounts. However, if the wage subsidy was received on or prior to 31 March 2020, you will need to record that portion as accurately as you can for tax purposes.
In Joe’s example, he received the wage subsidy on 27th March 2020, so he will need to return 4 days of the subsidy (27th – 31st March) in his tax return for the year ended 31 March 2020. The remainder of the subsidy will be returned in his tax return for the year ended 31 March 2021.
Joe will return the following amounts in his 2020 and 2021 tax returns (noting 12 weeks of wage subsidy = 84 days)
31 March 2020 - $7029.60 x 4/84 = $334.74
31 March 2021 - $7029.60 x 80/84 = $6,694.86
If you are not confident in preparing journals, you can reach out to your local BDO advisor for assistance. You can also choose the ‘Save as draft’ option and have your advisor review your journal before it is actioned in the accounts.
Once all your journals are done –
Run your Balance Sheet Report in Xero – if you have done your journals correctly the Liability Account Code should now have a ‘nil’ balance.
Run you Profit and Loss Report in Xero – you should now see the wage subsidy sitting in the income account code we created for it in Step 1.