CHAPTER FOUR

4. Ethiopian Payroll System

The Ethiopian payroll system is designed to comply with the country's labor, pension, and tax
laws while ensuring that employees receive fair wages, benefits, and legal protections. Here's
a breakdown of the key aspects of the Ethiopian payroll system:

4.1. Overview of Ethiopian Labor Laws

The Ethiopian labor laws primarily aim to regulate the relationship between employers and
employees, safeguarding the rights of workers while balancing the interests of employers.
Some of the core components of the Ethiopian Labor Proclamation No. 1156/2019 include:

 Employment Contracts: Employment contracts, whether written or oral, should

define the relationship, including job roles, duration, salary, and terms of termination.
 Working Hours: The maximum working hours are 8 hours per day, and 40 hours per
week. Overtime work is typically paid at a higher rate.
 Rest Periods: Employees are entitled to a minimum of 1 day off per week and paid
public holidays.
 Termination: The law protects workers from arbitrary termination and requires
employers to provide reasons for dismissal. Severance pay and notice periods are
specified.
 Health and Safety: Employers must ensure safe working environments and comply
with health and safety regulations.

4.2. Overview of Ethiopian Pension Laws

The Ethiopian Social Security Agency (ESSA) manages pension contributions under the
Pension Proclamation No. 714/2011. Key provisions include:

 Pension Contributions: Both employees and employers must contribute to the

pension system. The employee contributes 7% of their monthly salary, and the
employer contributes 11%. This results in a total contribution of 18% towards pension
benefits.
 Pension Fund: The fund provides retirement benefits, disability benefits, and benefits
for the survivors of deceased workers. It ensures that employees can maintain a level
of income after retirement.
 Eligibility: Workers who are covered by the social security law and contribute
regularly are eligible for retirement benefits at the age of 60.
 Types of Benefits: Benefits include old-age pension, disability pension, and family
survivor benefits.

4.3. Overview of Ethiopian Employment Income Tax

Income tax in Ethiopia is regulated by the Proclamation No. 847/2014, which sets out the
framework for taxing employment income.

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  Progressive Tax Rates: Ethiopian tax law uses a progressive tax system for
individuals. The tax rates for monthly salary (as of 2024) are as follows:

Employment Income per Month Range of TEI Tax Per

Month
TB Over Birr To Birr Tax Rate

1st 0 600 600 Exempt (0%)

2nd 601 1,650 1,050 10%

3rd 1,651 3,200 1,550 15%

4th 3.201 5,250 2,050 20%

5th 5.251 7,800 2,550 25%

6th 7,801 10,900 3,100 30%

7th >10,900 **** 35%

Short Cut Formula:-

Taxable income(birr) Formula
<600 Exempted
601-1650 (n*10%)-60
1651-3200 (n*15%)-142.5
3201-5250 (n*20%)-302.5
5251-7800 (n*25%)-565
7801-10900 (n*30%)-955
>10900 (n*35%)-1500

Where “n” is Total taxable income.

Tax Withholding: Employers are responsible for deducting the appropriate tax from
employees' salaries each month.

Taxable Income: Taxable income includes the basic salary, bonuses, and allowances, but
excludes pension contributions and other legally exempt amounts.

4.4. Salary, Allowances, and Fringe Benefits

Salaries, allowances, and fringe benefits in Ethiopia are subject to labor and tax laws. Some
of the common components include:

 Salary: The basic payment for the work performed. It is subject to taxation and
pension deductions.
 Allowances: These are additional payments made to employees, such as:
o Income from employment received by casual employees

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 o Income from employment received by diplomatic and consular
representatives; and other persons employed in any Embassy
o Payments made to a person as compensation or gratitude in relation to
personal injuries; or the death of another person.
o Medical Allowance
o Per-diem Allowance (Daily Allowance)
o Traveling Expenses
o Income of persons employed for domestic duties
o Position Allowance - a monthly sum paid to an employee for bearing a
particular office responsibility, e.g. head of a particular Department or Division.
o House Allowance – a monthly allowance given to cover housing costs of the
individual employee when the employment contract requires the employer to
provide housing but fails to do so.
o Disturbance Allowance – a sum of money given to an employee to compensate
for an inconvenient circumstance caused by the employer. For instance,
unexpected transfer to a different and distant work area or location.
o Desert Allowance – a monthly Allowance given to an employee because of
assignment to a relatively hot region. It is some times known as Hardship
Allowance
o Transportation (Fuel Allowance) – a monthly Allowance to an employee to
cover cost of transportation up to the work place if the employer has committed
itself to provide transportation service
 Fringe Benefits: Non-cash benefits offered to employees, such as:
o Health insurance
o Company car
o Educational allowances
o Pension contributions (Employer's share)

4.5. Overtime Payments

In Ethiopia, employees who work beyond the standard working hours are entitled to overtime
pay:

Overtime work is the work performed by an employee beyond the regular working hours or
days. Overtime earning is the amount payable to an employee for overtime work done. In
Ethiopia, in this respect, according to Article 33 of proclamation No.64/1975 the following is
discussed about payment for overtime work.
I. A worker shall be entitled to be paid at a rate of one and one quarter (1 ¼) times his
ordinary hourly rate for overtime work performed before 10 O'clock in the evening (10
p.m.). (From 6:00 am to 4:00 pm)
II. A worker shall be paid at the rate of one and one half (1 ½) times his ordinary hourly
rate for overtime work performed between 10 O’clock in the evening (10 p.m.)
and six O’clock in the morning (6 a.m.)
III. Overtime work performed on the weekly rest days shall be paid at a rate of two (2) times
the ordinary hourly rate of payment.
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 IV. A worker shall be paid at a rate of two and half (2 1/2) times the ordinary hourly rate for
overtime work performed on a public holiday.

4.6. Types of Leaves and Termination Benefits

The Ethiopian Labor Proclamation provides various types of leave and benefits for
employees:

Types of Leave:

 Annual Leave: Employees are entitled to 16 days of paid annual leave for each year
of service.
 Sick Leave: Employees are entitled to 12 weeks of paid sick leave if they have
worked for more than 1 year. For employees with less than 1 year of service, the leave
is unpaid.
 Maternity Leave: Female employees are entitled to 90 days of paid maternity leave,
which includes the time before and after childbirth.
 Paternity Leave: Male employees may receive 5 days of paid paternity leave.
 Public Holiday Leave: Employees are entitled to paid leave on public holidays.
 Special Leave: Includes leave for bereavement, family emergencies, or jury duty.

Termination Benefits:

 Severance Pay: If an employee is terminated without cause, they are entitled to

severance pay, which is calculated based on the duration of employment.
o 1-5 years of service: Severance pay is 1 month's salary for each year of
service.
o More than 5 years of service: Severance pay is 1.5 month's salary for each
year of service.

4.7. Components of Payroll Sheet

A payroll sheet is used to calculate and track employees' wages, deductions, and benefits.
Key components include:

1. Employee number.
2. Name of employees
3. Earnings
 The basic salary or Regular Earning
 Allowances
 Overtime Earnings
4. Deductions
 Employee Income Tax
 Pension Contribution
 Other Deductions (Voluntary Deductions)
5. The Net Pay
6. Signature

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4.8. Payroll-Related Journal Entries

The payroll-related journal entries record the salary expenses, deductions, and liabilities.
Some common entries include:

Ethio Relief Agency pays the salary of its employees according to the Ethiopian Calendar month.
The forth coming data relates to the month of Hider, 1998.

Name of Basic Allow OT Hrs Duration of BS per

S.No. Employee Salary ance worked OT work hour
01 Senait Bahiru 3,200 100 10 6 AM to 10 PM 20
02 Petros Challa 1,600 __ 8 10 PM to 6 AM 10
03 Abdu Mohammed 2,400 __ 6 Weekly Rest Days 15
04 Leilla Jemal 1,920 50 __ __ 12
05 Kirkos Wolde 1,280 50 10 Public Holidays 8

Additional Information:
Note that management of the agency usually expects an employee to work 40 hours in a week
and during Hidar 1998 all employees have worked as they have been expected. Besides, all
workers of this agency are permanent employees except Petros Chala and the monthly
allowance of Kirkos Wolde is not taxable; Abdu Mohammed agreed to have Br 200 be deducted
from his earning and paid to the Credit Association of the Agency as a monthly saving.
Instructions: Based on the above information:
A. Compute of earnings, deductions and net Pays
B. Prepare a payroll register (or Sheet) for the agency for the month of Hidar, 1998
C. Record the payment of salary as of Hidar 30, 1998 using Ck. No. 41 as a source documents
D. Record the payroll tax expense for the month of Hidar, 1998. Memorandum No.006
E. Record the payment of the claim of the credit Association of the agency that arose from
Hidar's payroll assuming that the payment was made on Tahsas 1, 1998
F. Record the payments of withholding taxes and payroll taxes of the month of Hidar, 19X8
assuming that they have been paid on Tahsas 5, 1998 via Ck. No. 50

A. Computations of Earnings, Deductions and Net Pays

OVERTIME EARNING:
Overtime Earning = OT Hrs Worked @ (Ordinary Hourly Rate @ OT Rate)
1. SENAYIT BAHIRU: 10 hrs @ (20 @ 1.25) = Br 250
2. PETROS CHALLA: 8 hrs @ (10 @ 1.5) = Br 120
3. ABDU MOHAMMED: 6 hrs @ (15 @ 2) = Br 180

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4. KIRKOS WOLDE: 10 hrs @ (8 @ 2.5) = Br 200
GROSS EARNINGS:
Gross Earnings = Basic Salary + Allowance + OT Earning
1. Senayit Bahiru: Br 3,200 + 100 + 250 = Br 3,550
2. Petros Challa: Br 1,600 + 0 + 120 = Br 1,720
3. Abdu Mohammed: Br 2,400+ 0 + 180 = Br 2,580
4. Leilla Jemal: Br 1,920 + 50 + 0 = Br 1,970
5. Kirkos Wolde: Br 1,280 + 50 + 200 = Br 1,530
DEDUCTIONS AND NET PAY:
 Employee Income Tax: =n*rate-deduction,
n=1530-50=1480 due to additional information for Kirkos Wolde
1. Senayit Bahiru: Br 3,550 *20%-302.5=407.5
2. Petros Challa: Br 1,720 *15%-142.5=115.5
3. Abdu Mohammed: Br 2,580 *15%-142.5=244.5
4. Leilla Jemal: Br 1,970 *15%-142.5=153
5. Kirkos Wolde: Br 1,480 *10%-60=88
 Pensions Contribution = Basic Salary @ 7%
1. Senayit Bahiru: Br 3,200* 7%=224
2. Petros Challa: 0
3. Abdu Mohammed: Br 2,400*7%=168
4. Leilla Jemal: Br 1,920 *7%=134.4
5. Kirkos Wolde: Br 1,280 *7%=89.6
 Total Deduction=EIT+PC+OD
1. Senayit Bahiru: 407.5+224+0=631.5
2. Petros Challa: 115.5+112+0=227.5
3. Abdu Mohammed: 244.5+168+200=612.5
4. Leilla Jemal: 153+134.4+0=287.4
5. Kirkos Wolde: 88+89.6+0=177.6
 Net Pay=Gross Earning-Total Deduction
1. Senayit Bahiru: Br 3,550-631.5=2,918.5
2. Petros Challa: Br 1,720-227.5=1,492.5
3. Abdu Mohammed: Br 2,580-612.5=1,967.5
4. Leilla Jemal: Br 1,970-287.4=1,682.6
5. Kirkos Wolde: Br 1,530-177.6=1,352.4

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 B. Preparing a payroll register (or Sheet)

ETHIO RELIEF AGENCY

Payroll Register (Sheet)
For Month of Hidar 1998
Pay Day: Hidar 30,19x8
Earnings Deductions
Seri Name of Basic Allow Over- Gross Income Pension Other Gross Net Pay
. No Employe Salary . Time Earning Tax Ded. Ded. Ded.
e
01 Senayet 3,200.00 100.0 250.0 3,550.00 407.50 224.00 __ 631.50 2,967.50
B. 0 0
02 Petros 1,600.00 __ 120.0 1720.00 115.50 __ __ 227.50 1,492.50
Ch. 0
03 Abdu M. 2,400.00 __ 180.0 2,580.00 244.50 168.00 200 612.50 1,967.50
0
04 Leila J. 1,920.00 50.00 __ 1,970.00 153.00 134.40 __ 287.40 1,682.60
05 Kirkos 1,280.00 50.00 200.0 1,530.00 88.00 89.60 __ 177.60 1,352.40
W. 0
Totals 10,400.00 200.0 750.0 11,350.00 1,008.50 616.00 200.0 1,936.00 9,462.50
0 0 0

C. Recording the Payment of Salary on Hidar 30, 1998

Salary Expense 11,350
Employee Income Tax Payable 1,008.50
Pension Contribution Payable 616
Credit Association Payable 200
Cash 9,462.50
Ck. No. 41
D. Recording the Payroll Tax Expense for Hidar, 19X8
Ethio - Relief Agency incurred payroll tax expense of Br 528 during Hidar, 19X8. This is
determined as the product of the basic salary of all permanent employees and 7%. This is
because the agency has to contribute 6% of the basic salary of every permanent employee to the
government pension trust fund. Thus,
Withholding Tax Expense = Total Basic Salary of all permanent Employees @ 7%
= (3,200 + 2,400 + 1,920 + 1,280) @ 7% = Br 616
By the amount of Br 528 the agency's expense, payroll taxes expense, and pension contributions
payable increase. Therefore, the following journal entry is made as of Hidar 30, 1998:
Withholding Tax Expense 616
Pension Contribution Payable 616
Memorandum No. 006
E. Recording the payment of the claim of the credit Association
Credit Association Payable 200
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 Cash 200

F. Recording the payments of withholding taxes, payroll taxes and employee income
tax of the month
Payroll Tax Expense = (3,200 + 2,400 + 1,920 + 1,280) @ 11% = Br 968

Employee Income Tax Payable 1,008.5

Pension Contribution Payable 1,584
Cash 2,592.50
Ck. No. 50
1.4. Presentation of liabilities on the balance sheet
- Two questions arise in connection to the presentation of current liabilities in the
balance sheet.
• What is the basis of ordering current liabilities?
Current liabilities may be reported in the order of maturity or according to amount (largest to
smallest). These two bases can’t be achieved together, and the compromise is to rank current
liabilities in order of amount (largest to smallest), unless differences in maturity dates are
significant (those maturing shortly after the balance sheet date come first).

• What is the extent of disclosure required for different types of current liabilities?

The extent of disclosure depends on the purpose for which the balance sheet is prepared. The
liabilities for presentation in annual reports are not as detailed as that prepared for short-term
loan application.