Ethiopian Payroll System Compliaed by Anemut B. (2015 E.

C Unit 4

Chapter Four
4. Ethiopian Payroll System
4.1. The prescribed rules for the accounting for employee benefits under IFRS
The prescribed rules for the accounting for employee benefits under IFRS have evolved markedly over the
past 25 years. IAS 19 identifies and provides accounting direction for four categories of employee benefits.
These are:
1. Postemployment benefits such as pensions and other postretirement benefits;
2. Short-term employee benefits: such as wages and salaries as well as compensated absences, profit
sharing and bonuses, nonmonetary fringe benefits of health insurance, housing subsidies, and
employer-provided automobiles, to the extent these are granted to current (not retired) employees.
3. Other long-term employee benefits, such as long-term (sabbatical) leave, long-term disability
benefits and, if payable after 12 months beyond the end of the reporting period, profit sharing and
bonus arrangements and deferred compensation employee compensation of share-based
compensation arrangements.
4. Termination benefits, which are payments to be made upon termination of employment under
defined circumstances, generally when employees are induced to leave employment before normal
retirement age. Each of the foregoing categories of employee benefits will be explained later in this
chapter.
4.2. Overview of Ethiopian labor laws
It was partly in response to the observations made by the House of People's Representatives adopted Labour
Proclamation No. 1156/2019 (Federal Negarit Gazette No. 89, 5th September, 2019).
 First, collective labor law relates to the tripartite relationship between employee, employer and
union.
 Second, individual labor law concerns employees' rights at work and through the contract for
work. Once an Employment relation is formed there are certain obligations that are imposed on an
employer. Such obligations may serve as the rights of the employee by default.
Labour Proclamation No. 1156/2019 states that:
1. A salary is a form of periodic payment from an employer to an employee, which may be specified in an
employment contract. Salary is a fixed amount of money or compensation paid to an employee by an
employer in return for work performed. The definition of a salary is a regular fixed payment that a
person earns for performing work during a specific period of time.

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2. Wages” means the regular non-permanent payment to which a worker is entitled in return for the
performance of the work that he performs under a contract of employment. For the purposes of this
Proclamation, the following payments shall not be considered as wages:
 Over-time pay;
 Amount received by way of per-diems, hardship allowances, transport allowance, r e l o c
a t i o n expenses, and similar allowance payable to the worker on the occasion of travel
or change of his residence;
 Bonus;
 Commission;
 Other incentives paid for additional work results;
 Service charge received from customers.
In this proclamation, “normal hours of work” means the time during which a worker actually performs work
or avails himself for work in accordance with law, collective agreement or work rules. Normal hours of work
shall not exceed 8 hours a day or 48 hours a week.
3. Over-time rate: overtime work shall not exceed four hours in a day and twelve hours in a week.
Overtime Payment In addition to his normal wage, a worker who works over-time shall be entitled.
Proclamation No. 979/2008 states that the following are not taxable : Income from employment received
by casual employees who are not regularly employed provided that they do not work for more than one
month for the same employer in any twelve months period.
I. Pension contribution, provident fund and all forms of retirement benefits contributed by employers
in an amount that doesn’t exceed 15% of the monthly salary of the employee.
II. Payments made to (an employee) as a compensation or gratitude in relation to:
 personal injuries suffered by that person
 the death of another person

The council of ministers regulation No. 78/2008 Regulation issued pursuant to the income tax proclamation
further exempts the following from income tax.
I. Amounts paid by employers to cover the actual cost of medical treatment of employees.
II. Allowance in view of means of transportation granted to employees under contract of employment,
i.e., transportation allowance.
III. Hardship allowance
IV. Amounts paid by employee in reimbursement of traveling expenses incurred on duty.

4.3. Overview of Ethiopian pension laws

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The House of People's Representatives amended Labor Proclamation No. 42/1993, by No. 377/2003, by
February 2004 by proclamation No.1267|2022 that effective since March/ 2022 as per Proclamation
88/1994). Permanent public servant of governmental organization in Ethiopia is expected to pay or
contribute 7% of their basic salary to the governments’ pension trust fund. The public servant public office
(employer) is also expected to contribute towards pension fund 11% of the basic salary of every permanent
government employee. On the other hand military and police public office should contribute 33% of the
basic salary of every permanent government employee, where as their employees contribute 7%. In addition
private business also obligated to adhere for the same thing, i.e. to withhold pension for its employees.
4.4. Overview of Ethiopian employment income tax
Employment income tax rates are progressive, with the minimum of 0 and maximum being set at 35%
for employment income that is greater than Birr 10,900. Employment income tax is a tax on the earnings of
an employee. The government collects this tax from any individual employees, other than contractors,
engaged whether on a permanent or temporary basis to perform services under the direction and control of
the employer.
The tax rates under schedule A and Short cut to Income Tax Calculation

Employment Income (per month) Income Tax rate Deduction Income Tax Payable
From birr 0 up to 600 Exempt (Free From Tax) 0 No tax
From birr 601 up to 1650 10% 60 (10% X EI) – 60
From birr 1651 up to 3200 15% 142.5 (15% X EI) – 142.5
From birr 3201 up to 5250 20% 302 (20% X EI) – 302
From birr 5251 up to 7800 25% 565 (25% X EI) – 565
From birr 7801 up to 10900 30% 955 (30% X EI) – 955
Over 10900 35% 1500 (35% X EI) – 1500

4.4.1. Salary, allowances, and fringe benefits.

I. Salary
The definition of a salary is a regular fixed payment that a person earns for performing work during a
specific period of time. Employees who are compensated on a salary basis receive their full pay, regardless
of how many hours they work in a week.

II. Allowances

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Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular
expenses, whether personal or for the performance of his duties. Allowances- may include as Position
allowance-
allowance- a monthly paid to an employee of earning a particular office responsibility, Housing allowance- a
monthly allowance given to cover housing costs of the individual employee when the employment contract
requires the employer to provide housing but the employer fails to do so, Hardship allowance-
allowance- a sum of
money given to an employee to compensate for an inconvenient circumstance caused by the employer.
For instance, unexpected transfer to different and distant work area or location, Desert allowance- a monthly
allowance given to an employee because of assignment to a relatively hot region, Transportation (fuel)
allowance- a monthly allowance to an employee to cover cost of transportation up to her workplace if the
employer has committed itself to provide transportation service and others.
III. Fringe benefits
Fringe benefits are perks that employers give to their employees above and beyond any financial
compensation. The most common Fringe benefits include life, disability, and health insurance, tuition
reimbursement, and education assistance, as well as retirement benefits. A fringe benefit is a form of pay for
the performance of services. The common types of Fringe benefits are A large section of the guide deals with
accommodation fringe benefits, Free or cheap services, Low or interest free debt, Subsidies in respect of
debt, Employer contributions to insurance and/or medical schemes and/or medical costs incurred by the
employer and Bursaries paid to children and staff. Fringe benefits provided to managerial and supervisory
employees are subject to 32% fringe benefit tax.
IV. Overtime payments rate
A worker shall be entitled to the paid at a rate of
Over time schedule Over time rate
Before 10:00 P.M in the evening. 1.5 times overtime work performed
Between 10:00 P.M and six (6:00 A.M) in the morning. 1.75 times overtime work performed
on weekly rest days 2 times overtime work performed
on a public holiday 2.5 times overtime work performed
V. Types of leaves and termination benefits
A. Leaves and Types of leaves
For many companies, a leave policy consists of letting their employees know about their paid
leave days and the national holidays they get. But, leave policies are more important than you’d
realize. The most common questions of many candidates who are being recruited by a company is
about the organization’s leave policy, number of leaves, potential employees also want to know
the types of leaves that the company has provided, for different needs and emergencies that the
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employee has. In this article, we’re looking into the 8 types of leave of absence every company
must provide its employees, Sick leave, Casual leave, Public holiday, Religious holidays, Maternity leave,
Paternity leave, Bereavement leave and Compensatory leave.
B. Termination benefits
The most common termination benefits are a severance payment, extended health insurance coverage
and assistance in finding a new job. Some employers may also provide working space to former employees
that they can use during their job searches. It is relate to permanently ceasing an employment relationship
and can take various forms, including lump-sum payments and/or periodic future payments. Those benefits
can be offered as part of a larger restructuring event or separately.
An important distinction in accounting for employee termination benefits is whether those measures are
voluntary or involuntary. Because those who quit may not receive unemployment insurance or
severance given that any resulting unemployment is intentional or voluntary. Other benefits are continuation
of health and life insurance, payment for vacation and sick time, and transfer of your pension.
4.4.2. ETHIOPIAN PAYROLL SYSTEM
I. Importance of Payroll Accounting
Accounting for payroll is particularly important because:
1. Payroll often represents the largest expense that a company incurs.
2. Both federal and state governments require that detailed payroll records be kept and
3. Employees are sensitive to payroll errors or irregularities. To maintain good employee
morale payroll must be paid on a timely and accurate basis.

II. Definition of Payroll Related Terms

1. Salary and Wages: wages are usually paid when a particular piece of work is completed or weekly
were as salaries are payments to employees who render managerial, administrative or similar
services, and they are usually paid to skilled labor on a monthly or yearly basis.
2. The Pay Period: A pay period refers to the length of time covered by each payroll payment.
3. The Pay Day: The pay day- is the day on which wages or salaries are paid to employees. This is
usually on the last day of the pay period.
4. A Payroll Register (sheet): It is the list of employees of a business along with each employee’s
gross earnings; deductions and net pay (take home pay) for a particular pay period. The payroll
register (sheet) is prepared based on attendance sheets, punched (clock) cards or time cards.
5. Pay Check: A business can pay payroll by writing a check for the amount of the net pay. A check
is prepared in the name of each employee and handed to employees. Alternatively a check for the
total net pay can be prepared for employees to the paid by cash at the organization.
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6. Employee income tax:

tax: They are taxes collected from the earnings of employees by the employer
organization as per the regulations of the government. These have to be submitted (paid) to the
government because employer organization is only acting as an agent of the government in
collecting these taxes from employees.
7. Payroll Deductions: They are deductions from the gross earnings of an employee such as
employment income taxes (with holding taxes), labor union dues, fines, credit association pays etc.
8. Net Pay: Net Pay is the earning of an employee after all deductions have been deducted. This is
the take home pay amount collected by an employee on the payday.
9. Employee Number:
Number: Number assigned to employees for identification purpose when a relatively
large number of employees are involved in a payroll register.
4.4.3. Components of payroll sheet
1. Employees Earnings:
Earnings: Money earned by an employee from various sources. This may include.
 Basic Salary-
Salary- a flat monthly salary of an employee for carrying out the normal work of
employment and subject to change when the employee is promoted.
 Others earnigs: like Allowances, over earning, frige benefits, bounece, and others.
2. Deduction: are subtractions made from the earnings of employees required by the government or
permitted by the employee himself. These are Employment Income Tax, Pension Contribution
and Others.
A. Employment Income Tax:
Tax: Every citizen is required to pay employee income tax to the
government in almost all countries including Ethiopia. Employment Income Tax,
 : Every citizen is required to pay employee income tax to the government in almost all countries.
In Ethiopia also, income tax is charged on the gross earnings of the employee at the rates
indicated under schedule A of the Proclamation N. 979/2008- Income tax proclamation.
EI = Employment Income or taxable income
60 = (600 X 0.1) – 0
142.5 = [(600 X .15) – 0] + [(1050 X 0.15) – (1050 X 0.1)] and so forth
Note;-
Note;- In computing and withholding tax, the income tax proclamation dictates that income attributable
to the month of Selassie and Pagumen shall be aggregated (added) and treated as the income of one
month. Taxable income includes any payment or gains in cash or in kind received from employment
by an individual, including income from former employment or otherwise or from prospective
employment.
 Short cute methods
Example by referring to the above table, we can see that 2,000 birr falls in the No. 4 row.
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So, Tax Rate = 15% and

Deduction = 142.50.
Income Tax = (2,000 Birr x 15%) – 142.50
= 2,000 Birr – 157.50
= 1,842.50
= Employee Pension 2,000 x 7%
= 140
Employee Net Income = gross earnig – total deduction
= 2000- 297.5
= 1702.50 Birr
B. Pension Contribution:
Contribution: Permanent employees of governmental organization in Ethiopia are
expected to pay or contribute 7% of their basic salary were as the employer is also expected
to contribute 11% for cevil servant employees and 33% for police and military to the
governments’ pension trust fund .
C. Others like: employees may individually authorize additional deductions such as deductions
to pay life insurance premiums, to repay loan from the employer, to pay for donation to
charitable organization, contributions to "Idir" etc.
3. Net Pay
Net pay represents the excess of gross earnings over total deductions of an employee.
Signature
The payroll sheet should have a column for signature of the employee to be taken when the employee
collects the net pay.
4.4.4. Major Activities Involved in providing Payroll
 Gathering the necessary data: All the relevant information about every employee should be gathered.
This requires reviewing various documents such as attendance sheets and doing some arithmetic
work.
 Entering the names of employees:
employees: along with the gathered data such as earnings, deductions and net
pays in the appropriate columns of the payroll register.
 Totaling and proving the payroll register: the grand total for earnings must be checked if its equal to
the sum of the grand totals of deductions and net pays.
 The accuracy and authenticity of the information:
information: summarized in the payroll should be verified by a
different person from the one who prepared it.
 Approval of the payroll:
payroll: should be approved by an authorized personnel (individual)
 Paying the payroll: either in cash or by writing a check.
 Journalizing the payment of the payroll and income taxes:
taxes: withheld from employees (withhold doing
tax liability) should be recorded in journal entry form.

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 The withholding tax:

tax: must be paid to the relevant government authority in time (promptly) and this is
recorded in journal entry form.
EXAPMPLE
BONGLON is a government agency recently organized to rehabilitate street children. It has five employees
whose salaries are paid according to the Ethiopian calendar month. The following data relates to the month
of Tikimt, 2010 E.C.
Serial Name of Basic Transp. Overtime Duration of
No. Employee Salary Allowance worked (hr) OT Work
01 Alem Tesfa Br. 1,730 200 4 before 6:00-10:00 P.M
02 Thomas Chala 10,200 ___ 8 Sunday (8:30-5:30)
03 Mudesir Kedir 15,300 150 ___ ___
04 Chala Belay 14,700 ___ 6 B\n 10:00 P.M_ (6:00 A.M)
05 Biruk Olango 1,950 1200 6 Public Holiday
Additional Information
 The management of the agency usually expects a worker to work 48 hours in a week and during
Tikimt there are four weeks.
 There were no absentees during the month.
 All employees are permanent except Chala and Biruk
 Thomas agreed to contribute monthly Br. 300 from his salary as a monthly saving in the credit
association of the agency.
Required
1. Prepare a payroll register (sheet) for the agency for the month of Tikimt, 2010.
2. Record the payment of salary as of Tikimt 30, 2010 using check stub No. 0123.
3. Record the payment of the claim of the credit Association of their agency on Hidar 1, 2010 use
check stub No. 0124.
4. Record the payment of the withholding taxes and pension contribution to the concerned
government body on Hidar 7, 2010.
5. Compute and recognize the total payroll tax expense for the month of Hidar, 2010E.C.

Computation of Earnings, Deductions and Net Pay

Gross Earnings = Basic salary + Allowance + Overtime Earning

1. Earnings
 Overtime Earning
Overtime earning = OT hrs worked X (ordinary hourly rate X relevant OT rate)
1. ALEM:
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 OT Earning = 4 hours X br. 1730 X 1.5 = br. 54. 0625

192 hours

2. THOMAS
 OT Earning = 8 hours X br. 10200 x 2 ----------------br.
----------------br. 850
192 hours
3. Chala
 OT Earning = 6 hours X br. 1470
14700 x 1.75 ----------------br.
----------------br. 803.90625
192 hours
4. Biruk Olango
 OT Earnings = 6 hours X br.
br. 1950 x 2.5 -------------br.
-------------br. 152. 34375
192 hours
GROSS EARNINGS
Gross Earnings = Basic salary + Allowance + OT Earnings
1. ALEM
 Gross Earnings = br. 1730 + br. 200 + br. 54. 0625 = br. 1984. 0625
 Remember taxable income in this case is br.1784.0625 because the transportation
allowance of br. 200 is not subject to taxation.
2. THOMAS
 Gross Earning = br. 10200+ br. 850 = br. 11,050
3. MUDESIR
 Gross Total Earnings = bir15300 + 150 = br. 15450,
4. CHALA
 Gross Total Earnings = br. 14700+803. 90625, =Br.15,
=Br.15, 503. 90625
5. BIRUK
 Gross Total Earnings = br. 1950 + 1200 + 152. 34375= br 3302. 34375
3. DEDUCTIONS
1. ALEM:
 Gross Total Earnings-----------------------------------------br. 1984. 0625
 Gross Taxable Income (br. 1984. 0625– br. 200) ------------ 1784. 0625
 Tax Expense= (TI x Tr) –ptd=(1784.0625 x 0.15) – 142.5=125.109375
Pension contribution = Basic salary x 7%
= br. 1730 x 0.07---------------------------------------------121.10
 Total Deduction (br. 125.109375+
125.109375+ br. 121.10)---------------br.
121.10)---------------br. 246.2097
246.20975
5
2. THOMAS:
 Gross Total Earning-----br. 11,050.
 Employee Income tax
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Earning X Income Tax Rate = Income Tax

0 – 600 ……….. (600) 0 br. 00.00
601 – 1650 on 1050 10% 105.00
1651 – 3200 on 1550 15% 232.50
3201 – 5250 on 2050 20% 410.00
5251 – 7800 on 2550 25% 637.50
7801 – 10900 on 3100 30% 930.00
Above 10900 on 150 35% 52.50
TOTAL br.11050------------------------------------------------------------br. 2367.50
 Pension Contribution (br. 10200 x 0.07)----------------------714.00
 Credit Association------------------------------------------------300.00
Association------------------------------------------------300.00
Total Deduction-----------------------------------------------------------
Deduction-----------------------------------------------------------br.
br. 3,381.50
3. MUDESIR:
 Gross Total Earnings----------------------------------------------br. 15450.00
 Gross Taxable Income (br. 15450 – br. 150)------------------------15300
Taxable income of Br. 15,300 is above Br 10,900.
Tax expense=taxable income x parallel tax rate mines parallel tax deduction
= (15,300*0.35)-1,500
=3855
Pension contribution (br. 15300 x 0.07) --------------------------------------------- 1071.00
Total Deductions--------------------------------------------------------------br
Deductions--------------------------------------------------------------br 4926. 00
4. CHALA:
 Gross Total Earnings-----------------------------------------------br. 15,503. 90625
 Gross Taxable Income-------------------------------------------------15,503. 90625
Taxable income of Br. 15,503.90625 is above Br 10,900.
Tax expense=taxable income x parallel tax rate mines parallel tax deduction
= (15,503.90625*0.35)-1,500
=3,926.3671875
NB. No pension contributions because he is not permanent employee of the organization.
Therefore, Total Deductions-----------------------------------------------------------br
Deductions-----------------------------------------------------------br 3926. 3671875
5. BIRUK:
Tax expense=taxable income x parallel tax rate mines parallel tax deduction
= (3,102.34375*0.15)-142.5
=322.8515625

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NB. Pension contribution should not be computed for Biruk because he is not permanent
employee of the agency. Thus, the only deduction from Biruk’s earnings is the employee income
tax.
Therefore, Total Deductions-----------------------------------------------------------br
Deductions-----------------------------------------------------------br 322.8515625
4. NET PAY:
PAY:
Net pay = Gross Total Earnings – Total Deductions
1. ALEM:
Net pay = br 1984. 0625
0625 – br 246.20975
= br. 1737.85275
2. THOMAS:
Net pay = br. 11,050.00 – br 3,381.5.00
= br. 7,668.5
3. MUDESIR:
MUDESIR:
Net pay = br. 15450 – br. 4,926.00
= br. 10524.00
4. CHALA:
Net pay = br. 15,503. 90625 – br. 3,926.3671875
= br. 11,577.539063
5. BIRUK:
Net pay = br. 3302. 34375 – br. 322.8515625
= br 2979.4921875
5. PROVING THE PAYROLL:
Total Earnings:
Basic salary----------------------------------------br. 43880.00
Allowances---------------------------------------------15
Allowances---------------------------------------------1550.00
50.00
Overtime------------------------------------------------1,860.3125
Overtime------------------------------------------------1,860.3125
Grand Total------------------------------------------------------------------------br
Total------------------------------------------------------------------------br 47,290.3125
Deductions:
Employee Income Taxes-------------------------br 10,596. 828125
Pension Contributions-------------------------------1906.10
Other Deductions--------------------------------------300.00
Deductions--------------------------------------300.00
Total Deductions------------------------------------------------------------------br 12,802. 928125
Net Pay Total----------------------------------------------------------------------br.
Total----------------------------------------------------------------------br. 34,487.384375
The payroll register (or sheet) for Bonglon Rehabilitation Agency prepared for the Month of Tikimt, 2010 20 0 is
shown below.
Bonglon Co.
Payroll Register (sheet)
For the Month of Tikimt, 2010
Ser Name of Earnings Gross Deductions Sign
.No. Employee Earning Total Net .
Basic Allo- Over Income Pension Other
Deduc. Pay
salary wance Time Tax Contr. Deduc.

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01 Alem Tesfa 1730.00

1730. 200.00
200. 54. 0625 1984. 125. 121. ___ 246. 1737.
0625 109375 10 20975 85275

02 Thomas Chala 10200.00

10200. ___ 850.00
850 11,050.
11,050 2367. 714. 300.
300 3,381. 7,668.
00 50 00 00 50 50

03 Mudesir Kedir 15300.00

15300 150.00
150 ___ 15450.
15450 3855. 1071. ___ 4926. 10524.
00 50 00 00 00
04 Chala Belay 14700.00
14700 ___ 803. 15,503. 3,934. ___ ___ 3924. 11,579.
90625 90625 406 25 3671875 539060

05 Biruk Olango 1950.00

1950 10200 152. 3302.343 322. ___ ___ 322. 2,979.
.00 34375 75 8515625 85155625 492193
8

Totals
43880.00 1550. 1,860. 47,513. 10706. 1906. 300.
300 12,802. 34,487.
00 3125 75 078125 10 00 928125 .384375

Prepared by_______________Checked by________________Approved by___________

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