Professional Documents
Culture Documents
CHAPTER THREE
THE PAYROLL ACCOUNTING SYSTEM
IN ETHIOPIAN CONTEXT
4) Deductions
These are subtractions made from the earnings of employees that is because it is required by
government or permitted by the employee himself.
In our country, Ethiopia, some of the deductions against the earnings of employees are:
A) Employee income tax
In Ethiopia every citizen is required to pay something in the form of income tax from
his/her earnings of employment. In this case a progressive income tax system that charges
higher rates for higher earnings is applied on the gross earnings of each employee save the
first 150 birr. According to proclamation No. 268/2002 that future amended the income tax
proclamation N o. 107/1994 given below exempts the first 150 birr of the earnings of an
employee from the income tax. The money on which a person does not pay income tax is
an EXEMPTION.
The amended income tax proclamation copied from 4th July 2002 Negarit Gazeta No. 34
states the following about employment income tax and its computation:
1) The first one hundred fifty birr (Birr 150) income from employment shall be exempt
from payment of income tax in all cases.
2) The tax on income from employment over one hundred fifty birr (> birr 150) shall be
charged, levied and collected monthly according to the following schedule.
Generally, taxable income from employment includes salaries, wages, allowances, directors’ fee
and other personal employment, all payments in cash and benefits in kind.
B) Pension Contributions
Permanent employees of governmental organization, which are governed by the existing
regulations of the Ethiopian public servants are expected to pay or contribute 4% of their basic
(monthly) salary to the Government Pension Trust Fund. This amount should be withheld
by the employer from the basic salary of each employee on every payroll and later be paid to
the respective government body.
On the other hand, the employer is also expected to contribute towards the same fund 6% of
the basic salary of every permanent employee of it. It is total amount is that we called earlier
as payroll tax expense to the employer organization. i.e. 6% of the total basic salary of all
permanent employee.
Consequently, the total contribution to the pension Trust Fund of the Ethiopian government is
equal to 10% of the total basic salary of all permanent employees of an organization(4%
comes from the employees and the 6% comes from the employer).
This enables a permanent employee of an organization to be entitled to the pension pay given
that the employee has satisfied the minimum requirements to enjoy this benefits when retired.
Non government organizations are also using this kind of scheme to benefit their employees
with some modifications. This is made in some NGO’s by keeping a fund known as
Provident Fund. Both the employees and the employer contribute towards this fund
monthly. Ultimately, when an employee is retired or drawn out of work a lump sum amount is
given at once.
C) Other deductions
A part from the above two kind of deductions from employees earnings, employee may
individually authorize additional deductions such as deduction to pay health or life insurance
Compiled by Dereje G. MU, CBE, DCS 5
Principles of accounting II
premium, to repay loans from the employer or credit associations, to pay for donations to
charitable organization,…etc
Each of the major other deductions may be put in special column in the payroll register.
Ultimately, the sum of the employees’ income tax, pension contributions, and other deductions
gives the total deductions from the gross earnings of an employee.
2) Signature
Unless some other document is used, the payroll sheet may be designed to allow a column for
signature of the employees after collection of the net pay.
In general, a payroll register should at least show the earnings, deductions and the net payment
with the names of the employees.
Demonstration problem
Messebo cement factory pays the salary of its employees according to the Ethiopian calendar
month.
The forth coming data related to the month of Ginbot, 2002.
Additional information;
Note that the management of the factory usually expects a worker to work 40 hours in a week and
during the month Ginbot all workers have done as they have been expected. Besides, all workers
of this factory are a permanent employees except Petros, the monthly allowance of kiros is not
taxable, and Abdu agreed to have a monthly Br.200 be deducted and paid to the credit association
of the factory as a monthly saving.
INSTRUCTIONS:
Based on the above information,
1) Prepare a payroll register (sheet) for the factory for the month of Ginbot, 2002?
2) Record the payment of salary as of Ginbot, 30 using Ck No. 21 as a source document?
3) Record the payroll tax expenses for the month of Ginbot?
4) Record the payment of the claims of the credit association of the factory that arose from
the Ginbot payroll assuming that the payment was made on Sene1, 2002?
3) Abdu
Gross taxable income = Br. 1376.00
Employee income tax: Earnings x ITR = IT
150 x 0% = 0.00
500 x 10% = 50.00
726 x 15% = 108.90
Total: Br. 1376 158.90
Pension Contribution: Basic Salary x 4%
1280 x 4% = 51.20
Credit association payment ------------------------------ 200.00
Total deductions: ------------------------------------------ Br.410.10
Net pay --------------------------------------------------- Br. 965.90
4) Leila
Gross taxable income = Br. 1010.00
Employee income tax: Earnings x ITR = IT
150 x 0% = 0.00
500 x 10% = 50.00
360 x 15% = 54.00
Total: Br. 1010.00 104.00