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. Leave payments for self-isolation as a result of COVID-19 (novel coronavirus) are also available to self-employed workers who satisfy the eligibility criteria and are prevented from working.
There are specific tax issues for the self-employed to consider.
Tax issues for self-employed customers
Spreading of the wage subsidy payment
Many self-employed people will receive the wage subsidy in the 2020 tax year, but (in most cases) only 1 or 2 weeks of it relates to the 2020 tax year. There is an issue about whether the wage subsidy received by a self-employed person is taxable in the year it is received or spread over the 12-week period.
Inland Revenue’s position is that these payments qualify as ‘compensation’ for the purposes of section CG 5B and can therefore be returned in the income year which the income being replaced would have been derived. In practical terms this means an amount received prior to 31 March 2020 can be spread if it relates to income that would have been derived after 31 March (the 2021 year).
The wage subsidy received by a self-employed person is not subject to ACC levies. Under section 14 of the ACC Act, the income must be derived from physical exertion before it will be liable for ACC levies.
To ensure the subsidy is not subject to ACC it is important to return it as ‘Other Income’ in the IR3 return. If it is included as part of the ‘Self-Employed Income’ ACC will have no way of identifying whether the amount is liable for ACC levies or not and as a result will charge the levy on the entire amount.
Companies with non-PAYE shareholder-employees, who have received the wage subsidy for these employees are liable to ACC levies on these amounts paid as a salary. These amounts should be included in the IR4S shareholder details sectionin the IR 4 income tax return. The shareholder should return their salary in the IR3 ‘Total shareholder-employee salary’ field.
Standard costs for home-based childcare providers
A childcare provider who derives gross income from providing a childcare service may be able to use the standard cost in Determination DET 09/02. Childcare providers are not required to use the standard cost in the Determination and can use actual costs supported by appropriate records if they prefer.
If you meet the criteria, and elect to use the Determination, you can deduct a set amount of expenditure as set out in the Determination. You cannot claim losses and are not required to file a tax return if both of these apply:
- after deducting the amount of the standard cost under the Determination, you have a loss or zero income
- you do not have any other income where tax has not been deducted at source.
If you elect to use the Determination, and receive a wage subsidy, then the IR413 can be used to calculate the net income under the standard cost method. The first two components of the formula are as following.
- Gross income received for childcare.
- Hours (children are in your household).
If you receive the wage subsidy during the period of the Covid-19 Alert Level-4 lock-down then this forms part of the ‘Gross income’ received – part A of the formula. However, as the actual childcare activity has ceased for the duration of the lock-down the ‘Hours’ – part B of the formula, will be NIL. This may result in a net income amount which needs to be included in your annual tax return.
Example: Mark, Self-employed Plumber
Mark is a self-employed plumber with a standard balance date of 31 March. He employs Mary part-time to assist with book-keeping and other general administration work that is required within the business and has a full-time apprentice. Both Mary and the apprentice receive regular wages. As a result of the impact of COVID-19, Mark’s business is facing significant financial pressure. On 27th March he applies for and receives a wage subsidy of $18,259.20 from MSD for himself, his apprentice plumber and Mary.
$7,029.60 of the wage subsidy is required to be passed on to Mark’s apprentice ($585.80 per week for the 12 week period of the wage subsidy) and $4,200 of the wage subsidy is required to be passed on to Mary ($350 per week for the 12 week period). These amounts will be treated as ordinary PAYE earnings in the hands of Mark’s employees with the relevant Kiwisaver, child support, student loan and PAYE deductions withheld. This portion of the wage subsidy which relates to Mark’s employees will be processed in the normal manner, regularly through its payroll system and the business will not take this portion of the subsidy into account when calculating its income tax liability. Please note these amounts should not be grossed up, therefore PAYE etc is deducted from the amounts of $7,029.60 and $4,200 respectively.
The remaining $7,029.60 of the wage subsidy relates to Mark’s own work in the business. Mark is required to account for income tax on this portion of the wage subsidy as it relates to Mark’s personal lost earnings. Mark will include this portion of the wage subsidy (the $7,029.60), in addition to his regular income for the rest of the year, in his Individual income tax return (IR 3).
Working out what part of the lump-sum subsidy is Mark's - for his work in the business
As the subsidy covers a 12 week period from the date it was credited to Mark’s bank account on 27th March 2020, Mark must caclulate what part of the lump-sum subsidy is for his own work in the business. Mark must calculate the part of the subsidy relating to the year ended 31 March 2020 and include this in his 2020 Individual income tax return - IR 3 (= $333.74 for the 4 days to 31 March 2020). The balance of the subsidy (= $6,694.86) relates to the period 1 April 2020 – 31 March 2021 and Mark will include this amount in his 2021 Individual income tax return – IR3.
Note: 12 weeks = 84 days to which the wage subsidy relates. 4/84 x $7,029.60 = $333.74 for the 4 days 27th March 2020 – 31st March 2020 to be included in the 2020 tax return. 80/84 x $7,029.60 = $6,694.86 for the remaining 80 days in the 2021 tax return. There are no GST implications on the receipt of the $18,259.20 wage subsidy.
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.