QUEEN’S COLLEGE SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING & FINANCE

Employment Income Tax

Individuals may receive various types of income such as wages or salary from employment, rent
from letting houses or buildings, interest from lending/saving money, and profit from their
trading activities or business. These individuals are required to pay income tax. They are ordered
to do so by income tax proclamations, regulation and directives. The law specifies how and when
these individuals have to pay the required tax.
How employers can determine the tax to be withheld?
To determine the tax to be withheld, the employer may use a simple calculation method. In
Ethiopia, employers can determine the tax to be withheld by following 3 key steps.
1. First add all the payments in cash and in kind made to their employees in a month.
2. Refer/consult a tax schedule (schedule that shows how much tax is owed for different amounts
of income earned by the employee) to find the tax rate applicable on the income earned by the
employee.
3. Multiply the taxable income by the tax rate and then minus the deductible fee: as indicated in
the tax schedule.

According to the income tax regulation No. 78/2002, the following

incomes are exempted from tax.
a. Amounts paid by employers to cover the actual cost of medical treatment of employees.
b. Allowance in lieu of means of transportation granted to employees under contract of
employment.
c. Hardship allowance for hot areas clearly defined by law.
d. Amounts paid to employees in reimbursement of traveling expenses incurred on duty;
e. Amounts of traveling expense paid to employees recruited from elsewhere than the place of
employment on joining and completion of employment or incase of foreigners traveling expenses
from or to their country, provided that such payments are made pursuant to specific provisions of
the contract;
f. Allowances paid to members and secretaries of boards of public enterprises and public bodies
as well as to members and secretaries of groups set up by the federal or regional government.
g. Income of persons employed for domestic duties.

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QUEEN’S COLLEGE SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING & FINANCE

Exemptions under directive No. 21/2009

The Authority has, based on directive No 21/2009, determined the amount of payments specified
under item (b) (d) and (e) above. Accordingly, monthly travel allowances which are exempted
from tax shall account for 1/4 of the employee's gross salary and it shall under no circumstances
exceed 1000 birr. The daily travel allowance for an employee who travels outside of their regular
work area to a place 25 k.m away may not exceed 150 birr or it shall under no circumstances
exceed 4 percent of his or her salary.
Amounts paid to employees in reimbursement of traveling expenses incurred on duty shall under
no circumstances exceed the standard air/ land fare.
- Travel allowance paid to a foreigner when he/she leaves the country at completion of his/her
contract shall be made based on the work contract and taking into account air and land transport
fare. The total weight of his/her baggage shall not exceed 300 k.g. according to article 7 of the
directive no. 21/2009, rewards for improving an existing technology or for creating a new one
and/or introducing a new system which enables cost reduction may be exempted from income
tax provided the reward giving organization is able to provide sufficient evidence that
demonstrates the reasons behind giving the reward. The authenticity of the evidence must be
beyond doubt. If there is any doubt about the authenticity of the presented evidence, the authority
may investigate the case to establish the truth and shall have the option to preclude the gift of the
reward from being exempted of income tax.
What are Non-deductible expenses?
According to sub article 4.2 of the directive No 21/2009, transport expenses from home to office
and vice-versa, and expenses to beneficiary who use company cars are non-deductible expenses.
What is the specific time to pay the withheld tax?
The employer shall pay the withheld tax to the Tax Authority within 30 days of the ends of each
calendar month. Each payment shall be accompanied by a statement with respect to each
employee who derives taxable income for the month.
The statement shall be in the form and furnished in the manner prescribed by the Tax Authority
and shall contain the following information.
a. The name, address and Tax Identification Number (TIN) of each employee;
b. The amount of taxable income derived by each employee from the employment;

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QUEEN’S COLLEGE SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING & FINANCE

c. The amount of tax withheld from that income and,

d. The amount of any tax exempt income derived by the employee.
If an employer finds out that his employee has more than one employment income and if he
ascertains that the other employer has not aggregated the said income, he shall aggregate and
withhold the tax thereof.
Employment income Income tax Deductible fee
(per month) Payable (%)
Over Birr To Birr
0 600 exempted 0
601 1,650 10% 60.00
1,651 3,200 15% 142.50
3,201 5,250 20% 302.50
5,251 7,800 25% 565.00
7,801 10,900 30% 955.00
Above 10,900 35% 1,500
 It is applicable from Hamle 1, 2008 E.c.
In the following section we have to evaluate and check employment income tax by considering
example.
No Name B.salar H.all T.all P.all G.I T.I I.T P.con Aba T.ded N.I
. y . . . . y
Dam
1 Abebe 3,200 500 400 - 4,10 3,20 337.5 224 64 625.5 3,474.5
0 0 0 0 0
2 Hirut 4,000 800 600 500
3 Guta 6,200 700 1,10 800
0
4 Erimya 1,800 500 400 -
s
5 Diriba 11,200 1,00 1,50 850
0 0
6 Meron 4,900 600 600 600
7 Tadesse 5,250 700 1,15 400
0
8 Abebec 2,600 500 400 -
h
9 Haile 1,550 500 400 -

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QUEEN’S COLLEGE SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING & FINANCE

10 Simegn 9,900 850 1,20 750

0
 Transportation allowance (T.all.) above ¼ of basic salary is exempted from tax but not
exceed 1,000
 Position income is fully taxable.
 Housing allowance is full exempted from tax.
 Abay dam contribution is 2% of basic salary.
 Pension contribution of employee is 7% basic salary.
 Pension contribution of employer is 9% of basic salary.

Required: Based on the above data fill the blank space of the table?

1. Abebe
Gross income = basic salary +housing allowance + transportation allowance
= 3,200 + 500 + 400
= 4,100
Taxable income = housing is not taxable and transportation is exempted up to 800
Birr (3,200/4 = 800). Hence; abebe is taxable for his salary only.
= 3,200
Income tax = ((3,200 x 15%)-142.50))
= 480 – 142.50
= 337.50
Pension contribution = (3,200 x 7%)
= 224
Abay dam contribution = (3,200 x 2%)
= 64
Total deduction = is sum of all deduction
= (income tax + pension contribution + Abay dam contribution)
= (337.50 + 224 + 64)
= 625.50
Net Income = Gross income less total deduction
= 4,100 - 625.50

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QUEEN’S COLLEGE SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING & FINANCE

= 3,474.50

5|Employment income tax By Yehualashet M. May, 2018