[US] COVID-19: Bookkeeping your payroll tax credits and deferrals

If you're claiming the Employee Retention Credit, Sick Leave Credit, Family and Medical Leave Credit, or deferring your payroll tax payments, here's how you can record it in Wave.

In response to the COVID-19 crisis, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and the Families First Coronavirus Response Act, or FFCRA. These two pieces of legislation gave businesses access to new payroll tax credits and deferrals, including the Employee Retention Credit, Sick Leave and Family & Medical Leave Credit, and deferral of Social Security tax payments. Wave Payroll will automatically create the journal transactions to record these; let's break down the details.

Employee Retention Credit

Sick and Family Medical Leave Credit

Deferral of employer social security tax payments

Be sure that you know whether the payroll journal transaction line item is for the Employee Retention Credit or the Sick Leave/Family & Medical Leave Credit, because you'll need to bookkeep them differently.

Employee Retention Credit

SUMMARY: Categorize the ERC line item to Payroll Gross Pay.

The amount of credit is calculated automatically every pay period. When the payroll journal transaction is created, the line item for the Employee Retention Credit will be an Uncategorized Income credit. According to the IRS, the amount of this credit should be recorded as a reduction of deductible payroll expenses. You can do that by categorizing the ERC line item to Payroll Gross Pay in the journal transaction. Easy!

Sick and Family Medical Leave Credit

SUMMARY: Make a new income account & categorize the credit line item to this account.

The amount of credit is calculated automatically every pay period. When the payroll journal transaction is created, the line item for the Sick Leave Credit will be a credit to Uncategorized Income. According to the IRS, the amount of this credit should be included in gross income. You can do that by categorizing the SLC to a new account:

  1. Under the Accounting tab in the left-hand navigation menu, select Chart of Accounts, then click the Add a New Account button.
  2. In the Account Type dropdown, scroll down to Income and select Other Income.
  3. Enter a name that you'll easily recognize, like "Sick leave credit." Click Save.
  4. Now, in the journal transaction recording each payroll period, categorize the credit line item to the Sick leave credit income account you just created.

And you're done!

Deferral of employer social security tax payments

SUMMARY: Continue to categorize payroll expense transactions from your bank to Payroll Liabilities.

If you choose to defer the payment of your employer social security tax until 12/31/21 and 12/31/22, Wave will automatically generate the same payroll journal transactions as usual. However, the amount of deferred taxes is not included in the journal entries.

If you want to bookkeep the deferred tax amount, you can follow these steps:

  1. Look up the amount of taxes you've deferred by navigating to Payroll > COVID-19, or Payroll > Taxes > Accumulating Taxes. Note how much has been deferred.
  2. Navigate to Accounting > Transactions. Click on the More button in the upper right corner, and choose "Add journal transaction."
  3. In the journal transaction, enter the amount of deferred payroll taxes as a debit to "Payroll Employer Taxes" and a credit to "Payroll Liabilities." Click Save.

If you want to separate the COVID tax deferral from the Wave-generated payroll entries, you can create a new "Due for Payroll" liability account called "Deferred Payroll Taxes." Replace the "Payroll Liabilities" account in the journal transaction with this new account.

Remember that when the deferred payroll taxes are due, Wave will generate an entry recording the expense and the liability. You'll need to reverse the appropriate amount of deferred taxes that you recorded manually.

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