Employers, including sole traders and the self-employed upon application, may be eligible for a wage subsidy paid by the Ministry of Social Development (MSD) if they have been affected by COVID-19. More information on this subsidy, including information on how to apply if you are eligible, is available on the Work and Income website.
COVID-19 Wage Subsidy - Work and Income
Wage subsidies should be passed onto the employee by the employer and processed as part of the employee's normal wages. All deductions (such as PAYE, KiwiSaver and child support) should be made as normal.
If the total wage (the subsidy plus the employer funded pay) amounts to the same wages as previously, the pay and deductions on their payslip should be the same. You may choose to top up the subsidy with cash payments or annual leave, but this should be arranged between the employee and employer.
The subsidy doesn't need to be accounted for separately when filing your Employment Information each payday. Include the subsidy and any employer funded pay as 'total wages paid' for each employee.
Some software packages may require you to identify the subsidy. if you are not sure what to do, check with your software provider.
The employer will not be liable for income tax or GST on the subsidy received from MSD and will not be entitled to an income tax deduction for wages paid out of the wage subsidy.
Example: Stef's Jet Skis Ltd
Stef's Jet Skis Ltd offers boat tours in Queenstown. It employs 5 full-time staff and 10 part-time staff. Its main customers are international tourists. As a result of COVID-19 it has seen a significant reduction in bookings and, with the closing of the borders, expects this to get worse over the coming months.
Stef's Jet Skis Ltd is eligible for the wage subsidy. When it applies for the subsidy, it receives a $75,158 lump sum payment from the Ministry of Social Development (MSD). Stef's Jet Skis Ltd is required to pass the subsidy on to its employees. It is not:
- liable for income tax on the subsidy received as this is excluded income
- required to account for GST on the subsidy received
- entitled to an income tax deduction in relation to the portion of wages paid funded by the wage subsidy.
Stef's Jet Skis Ltd can now afford to pay its staff the equivalent of their regular wage. The subsidy is included and processed in the company’s ordinary payroll with the relevant KiwiSaver, child support, student loan and PAYE deductions withheld.
Example: Blue Sky Ltd
Blue Sky Ltd has 40 full time employees. It applied for the wage subsidy when it was first announced and received a payment from the Ministry of Social Development (MSD) of $150,000 (as per the initial cap). As Blue Sky Ltd is now eligible for a wage subsidy of $281,184, MSD has made an additional payment of $131,184 to Blue Sky Ltd. Both payments are excluded income and will not be taken into account by Blue Sky Ltd when calculating its income tax liability. As the payment is a subsidy there are no GST implications on its receipt for Blue Sky Ltd.
The MSD payments are made to the employer to subsididise the gross payment of wages and therefore remain subject to PAYE and other usual employee deductions. Blue Sky Ltd is only able to pay its employee 90% of their regular wage, including the wage subsidy. The wage subsidy and (reduced) pay are processed by Blue Sky Ltd in the normal manner through its payroll system, and PAYE and KiwiSaver etc are deducted from the payments, withheld by the employer and passed on to us.
Please note that the wage subsidy amount should be included and returned as a gross amount in an employee’s pay, not a net amount.
Example: Self-employed dance teacher
Ani Kowhatu is a self-employed dance teacher and provides regular private lessons at her home, as well as tutoring a couple of dance students at a local high school. She does not employ any other dance instructors and is not registered for GST. Ani applies for and receives a $4,200 wage subsidy from MSD.
Ani is required to account for income tax on the wage subsidy received as it is a payment to replace loss of earnings. Ani will include the subsidy, in addition to her regular income for the rest of the year, in her Individual income tax return - IR3.
Please note that the tax-free treatment in respect of employers who receive the wage subsidy for their employees does not apply to self-employed people who receive the subsidy for their personal loss of income. The subsidy will only be tax free as excluded income for a self-employed person to the extent it is used by them to subsidise wages of their employees.
Example: Food Bank Wellington
Food Bank Wellington is a registered charity which operates a small second-hand shop to help generate funds for the food bank it operates. Although there are volunteers who work in the second-hand shop, it also employs three part-time staff who are university students. The charity shop is not an essential business and will be closed for at least the next four weeks, during the Level 4 lock down. Food Bank Wellington applies for and receives a wage subsidy from the Ministry of Social Development (MSD) of $12,600. Food Bank has no income tax or GST obligations in respect of the subsidy received.
Food Bank Wellington includes the wage subsidy from MSD in the pay of its part-time employees. With the wage subsidy it can continue to pay its employees while it is shut down. The subsidy is made as a gross payment from MSD and Food Bank Wellington withholds PAYE, KiwiSaver and student loan from the payments as it would with regular wages.