Unit of Competence Process Payroll

Module Title Processing Payroll

LG Code: LS A ACF3 081221

INSTRUCTER: Mr. ESTFANOS Z.

INTRODUCTION

Welcome to the module “Process Payroll”. This learner’s guide was

prepared to help you achieve the required competence in “Accounts and
Budget Support Level III”. This will be the source of information for you to

acquire knowledge attitude and skills in this particular occupation with

minimum supervision or help from your trainer.
Summary of Learning Outcomes

After completing this learning guide, you should be able to:

Lo1:- Record payroll data
Lo2:- Prepare payroll
Lo3:- Handle payroll enquiries

LO1: Record payroll data

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 1.1 Introduction to Payroll Accounting
It's a fact of business - if a company has employees, it has to account for payroll and fringe
benefits.
Fringe benefits – some benefits are offered to salaried employees other than their basic salary.
In this explanation of payroll accounting we'll introduce payroll, fringe benefits, and the payroll-
related accounts that a typical company will report on its income statement and balance sheet
.
THE PAYROLL ACCOUNTING IN ETHIOPIAN CONTEXT
The Importance of Payroll Accounting
The concept of payroll is often referred to the total amount paid to employees of a firm as a
compensation for the service rendered to a firm in a given period. The payroll accounting of a
firm has to be given emphases of significance for the following reasons.
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.
Moreover, since the payroll related payment is highly subject to certain fraudulent activities it is
imperative that businesses need to properly design their payroll system so that it safeguards the
company’s assets against unauthorized payments of payroll and the accuracy as well as reliability
of the accounting records is assured pertaining to payroll. Some of the possible frauds that can be
made on the payroll system are the following:
 Adding fictitious employees to the payroll
 Listing terminated employees on the payroll
 Using unauthorized pay rates
 Overstating working hours
 Issuing duplicate payroll checks
 Not deducting employees’ absent time
 Making incorrect totals on the payroll register
Payroll activities involve four functions: hiring employees, timekeeping, preparing the payroll, and
paying the payroll.
.
Payroll processing describes the preparation of paychecks (including withholding and
deductions), distribution of paychecks, and payment and porting of payroll taxes. Options for
payroll processing include doing it yourself with accounting software, hiring a bookkeeper, or
engaging a payroll service. It is the financial record of employees' salaries, wages, bonuses, net
pay, and deductions

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Matching Principle
As we proceed with our explanation of payroll accounting, it will be helpful to recall
the matching principle of accounting. This principle will guide us to better understand how
payroll and fringe benefits are reported on financial statements. (We're assuming that a company
follows the accrual method of accounting.)
The matching principle requires a company to match expenses to the accounting period in which
the related revenues are reported. If a direct connection between revenues and an expense does not
exist, then the expense should appear on the income statement for the accounting period in which
it was incurred. Keep in mind that expenses are often incurred (or occur) in a different
accounting period than when they are paid.

1.2 Definition of Payroll Related Terms

Salary and Wages: Salary and wages are usually used interchangeably. However, the term wages
is more correctly used to refer to payments to unskilled-manual labor. It is usually paid based on
the number of hours worked or the number of units produced. Therefore, wages are usually paid
when a particular piece of work is completed or weekly. On the other hand, salaries refers to
payments to employees who render managerial, administrative or similar services, and they are
usually paid to skilled labor on a monthly or yearly basis. Both wages and salaries related to an
‘employee’ is an individual who works primarily to one organization and whose activities are
under the direct supervision of employer.

The Pay Period: A pay period refers to the length of time covered by each payroll payment.
Pay period for wage workers are usually made on weekly. On the other hand, salaried employees’
pay periods are monthly or semimonthly.

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.

Basic records of a payroll accounting system includes:

1. A payroll register ( or sheet)
2. Individuals employees’ earnings records, and
3. Usually, pay checks.
These records are generated from a payroll system that is operated manually or using computers.
A. A Payroll Register (or sheet): the entire 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.

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 B. Employee earnings records: it is a summary of each employees’ earnings, deductions,
and net pay for each payroll period and of cumulative gross earnings during the year.
It is a separate record kept for each employee. The individual record of employees’
earnings helps the employer organization to properly summarize and file tax returns.
C. Pay Check: A business can pay payroll by writing a check for the total or individual 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.
D. Gross Earnings: It is the total pay to an employee before deductions for the pay period.
E. Payroll taxes: are taxes levied against the employer on the payroll of a firm. It is
additional payroll related expense to an employer.
F. Withholding Taxes: These are taxes levied against the earnings of the employees of an
organization and withheld by the employer per the regulations of the concerned
government.
G. Payroll Deductions: are deductions from the gross earnings of an employee such as
employment income taxes (withholding taxes), labor union dues, fines, credit association
pays.
H. 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.
Net pay is the amount that remains after withholdings are deducted from an employee's
gross pay. Net pay is also referred to as "take home pay" or the amount that an employee
"clears." From the company side of the transaction, it is the amount of cash the company
will pay directly to the employees on payday.

1.3 Possible Components of a Payroll Register

1. Employee number: Numbers assigned to employees for identification purpose when a
relatively large number of employees are included in the payroll register.

2. Name of employees: List of the names of employees

3. Earnings: Money earned by an employee(s) of a firm from various sources. Earning may
include the following elements.
A. The basic salary or regular earning: A flat monthly salary of an employee that is paid for
carrying out the normal work of employment and subject to change when the employee is
promoted. It can be expressed in an hourly rate:

Hourly pay rate =Monthly basic salary

Regular Working hours per month
B. Allowances: Money paid monthly to an employee for special reasons, which may include.

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 i. Position allowance: A monthly sum paid to an employee for bearing a particular
office responsibility, head of a particular department or division.
ii. 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.
iii. Hardship 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. It is sometimes known as
disturbance allowance.
iv. Desert allowance: A monthly allowance given to an employee because of assignment
to a relatively hot region.
v. 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.
C. Overtime Earning
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.
Overtime refers to time worked in excess of 40 hours per week
In Ethiopia, in this respect, according to Article 33 or proclamation no. 64/1975 the following is
stated about payment for overtime work.
 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).
 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.)
 Overtime work performed on the weekly rest days shall be paid at a rate of two (2) times the
ordinary hourly rate of payment.
 A worker shall be paid at a rate of two and half (2 ½) times the ordinary hourly rate for
overtime work performed on a public holiday.
Hence, the gross earnings of an employee may, therefore, include the basic salary, allowances and
overtime earnings. You may find sometimes other form of earnings such as bonus that is paid to
employees for achieving results better than usual.
Over time earning = Hours worked x (ordinary hourly rate x OT rate)
D. Bonus: is an amount paid to employees who achieved better results. Some firms may give
bonus for all employees as a way of motivation. Bonus could be determined based on
employees’ total earnings or the firm’s net income for the period.
Bonus allowed only once a year.
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4. Payroll deduction

Payroll deductions may be mandatory or voluntary. Mandatory deductions include deductions

required by law like income tax and pension contribution. The government legislation requires
employers to withhold from the pay of each employee the applicable income tax due on those
wages and salaries. The employer computes the amounts of income tax withhold deductions
according to a government prescribed formula or withholding tax table. Employees may
voluntarily authorize withholdings for charitable, retirement and other purposes. The employee
should authorize all voluntary deductions from gross earnings in writing.

5. The Net Pay/take home pay: This amount is held in one column of the payroll register
representing the excess of gross earnings over the total deductions of an employee. The column
“Net Pay” total shows the grand total deductions made from the earnings of employees.
6. 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 pays along with the name of employees.
Entries related to payroll
The journal entry for recording the payroll is based on the column totals from the payroll register.
Note that each account debited or credited is a total from the payroll register.
 Recording payroll expenses and liabilities
 Recording the payment of the payroll
 Recording employer payroll taxes
 Recording payment of withholdings, payroll taxes, and other deductions to each respective
recipient.

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LO2: Prepare payroll

2.1 Major types of Taxes Existing in Ethiopia

2.1.1 Meaning of tax

Tax is one of the most important sources of revenue to every government.
Taxes are compulsory payments to government without expectation of direct return or benefit to
the tax-payer. The people whom the tax is levied cannot refuse to pay the tax. Once it is levied
they have to pay it. Any refusal in this regard leads to punishments.
2.1.2 Tax Classifications
Taxes are sometimes referred to as direct or indirect.

Direct Taxes
A direct tax is paid by a person on whom it is levied. Under the direct taxes, the impact and
incidence fall on the same person. Direct tax is borne by the person on whom it is levied and
cannot be passed on to others. For example, when a person is assessed to income tax or wealth
tax, he/she has to pay it and he/she cannot shift the tax burden to anybody else. The direct taxes
levied in Ethiopia take the form of taxes on income and property
.
Indirect Taxes
Under indirect taxes, the impact and incidence fall on different persons. It is not borne by the
person on whom it is levied and can be passed to others. The person who is required to pay the tax
does not bear its burden. Thus, indirect taxes can be shifted.
2.1.3 Types of Tax Structure
Tax structures differ from country to country. This is mainly due to the fact that the
socioeconomic developments of countries vary from one another. There are different types of tax
structures (system) which are applied by the governments on different taxes. These are
progressive, regressive, proportional and digressive tax structures.
1 Progressive tax structure:
Progressive tax system can be defined as "a system in which rates of taxation would increase with
the increase in income i.e. higher the income, higher would be the rate of tax". The rates of
taxation increase as the tax base increases. Thus, the amount of tax payable is calculated by
multiplying the tax base with tax rate .
Note: The tax rate increases as the tax base income increase.
2. Regressive tax structure: this is the direct opposite of progressive tax structure. Means, as the
tax base of the tax payer decreases, the tax rate increase. Thus, the rich will pay less tax than the
poor. In regressive tax system, the amount of tax is smaller as a percentage of income for people
with larger incomes.
Note: The tax rate decreases as the tax base increases.
3. Proportional tax structure:
A proportional tax, also called a flat tax is a system that taxes all entities in a class typically either
citizens or corporations at the same rate (as a proportion on income), as opposed to a graduated

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(progressive) scheme. The term “flat tax” is one in which the tax amount is fixed as a function of
income and is a term mainly used in the context of income taxes.
4. Digressive tax structure: in this type of tax structure, the tax rate will progressive up to a certain
level of income of the taxpayers and then become constant after the maximum level of their
income range. Digressive tax is a mix between the progressive and proportional tax systems. In the
case of digressive tax, the tax rate is increased firstly with increase in income and then, the rate
remains flat or constant with further increase in income.
Tax evasion, avoidance and delinquency
Tax evasion: Tax evasion is a method of saving tax liability by a taxpayer through fraudulent
means or by directly violating tax laws. Tax evasion is illegal, unethical, uneconomical and highly
risky since it may result in penalty.
Tax Avoidance: Tax avoidance, which denotes the taxpayers’ ingenuity to arrange his affairs in a
proper manner so as to reduce the incidence of tax, is legal. As long as the provisions of the law
are not violated and transactions properly recorded, any attempt to minimize tax using those
accounting methods and principles that may useful to report less taxable income of the taxpayers
is acceptable.
Tax Delinquency: means the amount of tax uncollected in the previous fiscal period especially in
property tax. It may happen if the taxpayer unable to pay property tax due to bankrupt. If the
taxpayer can survive its loss for the coming year, the tax authority will collect both the current
year tax as well as delinquent tax otherwise it will be considered as uncollectible revenue by the
authority.
Income Taxes
The following the different types of income taxes implemented recently in Ethiopia.
1. Schedule ‘A’ Income: Employment Income
2. Schedule ‘B’ Income: Income from Rent of Buildings
3. Schedule ‘C’ Income: Business Income
4. Schedule ‘D’ Income: Other Incomes
5. Schedule ‘E’ Exempt income

2.1. Accounting for Employment Income Tax

Employment Income Tax is a direct tax levied on income from employment. It is the largest single
source of revenue for the federal government and perhaps the tax that fills the average taxpayer
with the greatest sense of fear. According to the Income Tax Proclamation, every person deriving
income from employment is liable to pay tax on that income at the rate specified in Schedule “A.
According to Proclamation No. 979/2008/2016, every person deriving monthly income from
employment is liable to pay tax on that income at the rate specified in schedule A.
 Employment income includes any form of payment or gain, either in the form of cash or in
kind, received from current former or prospecting employment by an individual.
 The following tax rates are applied for determination of tax payable on income from
employment. The rates range from 10% to 35% and making the first Birr 600 exempted from
tax payments.
 Persons working in different organizations should aggregate and declare their employment
income (any tax paid by the withholding agent should be considered deducted).

For tax purpose the Proclamation has defined an employee as any individual, other than a
contractor, engaged (whether on a permanent or temporary basis) to perform services under the

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direction and control of the employer. A contractor, on - the other hand, is defined as an individual
who is engaged to perform services under an agreement by which the individual retains substantial
authority to direct and control the manner in which the services are to be performed.
As per Income Tax Proclamation No. 979/2008, employment income shall include any payments
or gains in cash or in kind received from employment by an individual from all the employers.
These include:
1. Basic salary or wages
Wages means the regular payment to which the worker is entitled in return for the performance of
the work that he performs under a contract of employment. That is payment is received by
employee for regular or normal working hours. The regular working hours may vary from country
to country and organization to organization even within the same country. In Ethiopia, Normal
Working hours shall not exceed 8 (eight) hours per day or 48 (Forty eight) hours a week.
Normal working hours: the time during which a worker actually performs work or avails himself
for work in accordance with the law, collective agreement or work rules. The following payment
shall not be considered as wages: overtime payment, amount received by way of per-diem,
hardship allowance, transport allowances, transfer 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.
2. Overtime (OT) Income
Overtime income is a payment made to an employee for overtime work during a specific payroll
period. That is payment made for the work done in addition to one’s normal working hours. In
accordance with Article No. 66(1) of Labor Proclamation No. 377/2003, work done in excess of
the normal daily hours of work fixed in Article No. 61(1) i.e. eight hours per day or forty eight
hours a week shall be deemed to over time. Overtime shall be worked only in cases of actual or
threatened accident, force majeure, urgent work, and substitution of absent workers assigned on
work that runs continuously without interruption and on the express instructions of the employer.
To determine the overtime income, first we have to determine the Regular Hourly Rate. This is the
payment per hour for regular or normal working hours. It is determined as follows:
Regular Hourly Rate (RHR) = Basic Salary/Normal Working Hours
In Ethiopia, there are four over time payment durations. In addition to his normal wage, an
employee who works over time shall be at least to the following overtime payments.
 For OT jobs b/n 6:00 AM to 10:00 PM, OHR=RHR * 1.25
 For OT jobs b/n 10:00 PM to 6:00 AM, OHR=RHR *1.5
 For OT jobs on weekly rest day, OHR=RHR *2.0
 For OT jobs on public holiday, OHR=RHR *2.5

3. Allowances
Allowances are special payments made or benefits accrue to employees for various reasons. These
are:
 Educational allowance
 Hardship allowance (desert allowance)
 Cell phone allowance (mobile allowance)
 House rent allowance (house subsidy)

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  Meal allowance (lunch allowance)
 Medical allowance
 Per-diem allowance (daily allowance)
 Position allowance
 Representation allowance
 Transportation allowance (fuel allowance)
 Entertainment allowance (guest accommodation expenses)
4. Bonus: payment made to employees of businesses as acknowledgment of employees’ hard
work and effort in generating beyond expected amount of profits/attractive profit as a result of
best performance of the employees. Bonus allowed only once a year.

Employment Income Tax Rates

Employment income tax rate is applied progressively to different tax brackets. The Ethiopian
Employment Income Tax (Schedule “A”) has seven tax brackets. Article 11 of Income Tax
Proclamation No. 979/2008 provides that the following tax rate schedule shall be applied on
employment income;
TB Range of TEI Tax Rate Deduction
(Per month)
1st 0-600 Exempt 0
2nd 600-1650 10% 60
3rd 1650-3,200 15% 142.5
4th 3,200-5,250 20% 302.5
5th 5,250 -7,800 25% 565
6th 7,800 -10,900 30% 955
7th Over 10,900 35% 1500

Employment Income Tax Exemptions.

Council of Ministers exempted some of the incomes for economic, administrative or social
reasons. The following categories of payments in cash or benefits in kind shall be excluded from
computation of income taxable under Schedule “A” (Art.No.3 ECMR No. 78/2002):
 Medical Allowance: amounts paid by employers to cover the actual cost of medical
treatment of employees.
 Transportation Allowance: Allowances in lieu of means of transportation granted to
employees under contract of employment. Transportation allowance exempted from tax
payable for employee is only up to 1/4th (one forth) of the total salary of the employee and in
any circumstances the amount of transportation allowance exempted from tax must not be
more than Birr 2200. The permitted transportation allowance exempted from tax is only for
the task which is carried out by moving from place to place due to the nature of the work and
that is clearly stated in contractual agreement between the employer and employee.

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  Hardship Allowance/Disturbance Allowance: Payment made to an employee as a result of
change in work place
 Per-diem Allowance (Daily Allowance): Amounts paid to employees in reimbursement of
travelling expenses incurred on duty. These payments may include expenditures on food,
bed, transportation and others.
 Traveling Expenses: Amounts paid to employees resulted from elsewhere than the place of
employment on joining and completion of employment or in case of foreign travelling
expenses from or to their country, provided that such payments are made pursuant to specific
provisions of the contract.
 Board Allowances: allowances paid to members and secretaries of boards of public
enterprises and public bodies as well as members and secretaries of study groups set up by
the federal or regional government.
 Income of persons employed for domestic duties: For example: monthly salary of House
guards and house servants.
Computation of Taxable Employment Income (TEI)
Every person deriving income from employment is liable to pay tax on that income at the rate
specified in Schedule "A". But, the first Br, 600 of employment income is excluded from taxable
income. Employers have an obligation to withhold the tax from each payment to an employee and
to remit the amount of the tax withheld to the tax authority during each calendar month. In
determination of employment income, income attributable to the months of Nehassie and
Pagumen shall be aggregated and treated as the income of one month (Art. No. 10 of EITP No.
979/2016). Taxable Employment Income is defined as income which is subject to Employment
Income Tax. It is determined as follows:
TEI = Gross Employment Income – Special Tax Exemption – Tax Allowances

1. Gross Employment Income –refers to any income earned from employment sources regardless
of the way it is earned.
2. Tax Exemptions – are employment incomes exempted from EIT. Tax Exemptions are
classified into two: Direct/Special Exemptions and Personal Exemption
I.Direct/Special Tax Exemptions– are income directly exempted by the income tax proclamation
in Ethiopia for special reasons. For example: Hardship allowance, transportation allowance,
medical allowance, etc
ii. Personal Exemption– is a non-taxable income for each employee under Schedule “A”per
month. It is common to all employees regardless of their employment income, which is Br 600 per
month. It is considered an income taxable at rate of 0%.
3. Tax Allowances – are amounts which are allowed or permitted to be deducted from Gross
Employment Income for different reasons. For example: Mortgage allowance (deductible
mortgage interest) to encourage home ownership, child care allowance (investment made on
children) to encourage childcare, Charitable allowance (Charitable contributions) to encourage
giving, and others. However, there is no tax allowance in Ethiopia so that the formula for
calculating taxable Employment income can be modified to the following form:
TEI= Gross Employment Income – Special Tax Exemptions.
The detail calculation can be in one of the following two ways

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Alternative 1: When all payments are made at the end of the month
Determination of Taxable Employment Income
Basic salary.......................................................................... 6000
Overtime Pay..........................................................................1200
Transport allowance................................................................500
Other allowances....................................................................590
Gross Employment Income.....................................................8290
Less: Special Tax Exemptions.................................................(700)
Taxable Employment Income..................................................7590

Illustrations on calculating TEI

Exercise1: Ato Nahom is an employee of Excel Pvt. Ltd. Co. The basic salary of Br 7,000 is
meant for 160 normal working hours. He worked 170 hours during the month of Hamle
2013.Assuming that all overtime work is done on employee Rest days and the employee received
Br300 transportation allowance according to the employment contract, determine the taxable
employment income. Required: Determine taxable employment income
Solution
OT = (Br 7000/160) x 10 hrs x 2 = Br 875
TEI = Br 7000 + Br 875 = Br 7875
Exercise 2: Ato Jemal is head of Human resource department of xyz Family Pvt. Ltd. Co. Assume
the following
 He gets a monthly salary of Br 2,640 for 160 normal working hours;
 He worked 181 hours during the month of Sene 2011and all overtime work is done from
6:00 A.M. to 10:00 P.M.
 He is entitled to receive a Transportation Allowance of Br 1,000
Required: Determine the Taxable Employment Income of Ato Jemal?

Accounting for Employment Income Tax

Accounting for employment income tax is concerned with determination of Taxable Employment
Income as we discussed earlier. Accounting is also concerned with:
A. Determination EIT Base i.e. Taxable Employment Income
B. Calculation of Employment Income Tax;
C. Preparation of Employment Income Tax Declaration; and
D. Recording Employment Income Tax Related Transactions
Recording transactions is an overlapping activity with payroll accounting but the tax accountant
need not consider other transactions on the payroll
Calculation of Employment Income Tax (EIT)
Deduction Method

Table 4.1:1 Employment Income Tax under Deduction Method

TB Range of TEI Tax Rate Deduction EIT Calculation
(Per month)

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1st 0-600 Exempt 0 No Tax Payment
2nd 600-1650 10% 60 EIT = TEI * 10% – 60
3rd 1650-3,200 15% 142.5 EIT = TEI * 15% – 142.5
4th 3,200-5,250 20% 302.5 EIT = TEI * 20% – 302.5
5th 5,250 -7,800 25% 565 EIT = TEI * 25%n – 565
6th 7,800 -10,900 30% 955 EIT = TEI * 30% – 955
7th Over 10,900 35% 1500 EIT = TEI * 35% – 1500

Example1:
Ato Tomas is an employee of Hbret Company and his monthly basic salary is Br 5000.
In addition he is getting Br 100 monthly house allowance.
Required: Determine his taxable income and income tax liability.
Solution
Taxable Employment Income (TEI): Br 5000+Br 100 = Br 5,100
Tax liability = (Taxable income X Tax rate for the Bracket) – Deduction
(Br 5100 x 20%)-302.50 = Br 717.5
Example 2: Assuming Income of Br 1,000, determine employment income tax under Deduction
method?

Problem
Payroll accounting illustration
Illustration: Assume XYZ is a governmental agency organized to render public service. It has the
following data related to its employees whose salaries are paid according to the Ethiopian calendar
month of Yekatit, 2014 E.C.
Serial Name of Basic Transportation Over time Duration of Over
No. Employees Salary Allowance worked(hr.) Time work
01 Zerfie Shewa Br.1920 200 4 Up to 10:00 P.M
02 Paulos Chala 2,020 - 8 Weekend
03 Lema kebie 5,300 - - -
04 Tensay Belay 1,470 - - -
05 Haile Garba 2,950 600 6 Public holidays

Additional Information
- The management of the agency usually expects a worker to work 40 hours in a week and
during Yekatit there are four weeks.
- There were no absentees during the month.
- All employees are permanent except Tensay and Haile

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 - Lema agreed to contribute monthly Br. 400 and 200 from his salary as saving in the credit
association and as a donation to the homeless children’s respectively.
- Transportation allowance for Zerfie is non-taxable
- Paulos agreed to contribute monthly Br. 300 from his salary as a monthly saving in the credit
association of the agency.
- Haile agreed to donate monthly Br. 100 from his monthly salary as aid to orphans children’s
Required
a.Prepare a payroll register (sheet) for the agency for the month of Yekatit, 2014 E.C.

b.Record the payment of salary as of Yekatit 30, 2014E.C using check stub No. 0123.

c. Recognition of payroll tax expense/withholding taxes on Yekatit 30

d.Record the payment of the claim of the credit Association of their agency on Megabit 1, 2014
E.C using check stub No. 0124.

e. Record the payment of donations on Megabit 3,2014 E.C.

f. Record the payment of the withholding taxes and pension contribution to the concerned
government body on Megabit 7, 2014 E.C.
a. Computation of Earnings, Deductions and Net Pay

Gross pay/earning = Basic salaries+ Allowances + Over time earnings + Commissions + Bonuses +
Other earnings.

Overtime earning = OT hrs worked X (ordinary hourly rate X relevant OT rate)

1. ZERFIE:
 OT Earning = 4 hours X Br. 1920 X 1.25 = Br. 60

160 hours
NB: Every employee is expected to work 160 hours per month
(I.e. 40 hours x 4 weeks)
 You should compute the regular hourly rate first:

Regular Hourly Rate = Monthly salary (Basic Salary)

Total Hours worked in the Month
= Br. 1,920
160 Hours
 Therefore, the regular Hourly payment = Br. 12

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 The regular hourly payment must be multiplied by the appropriate OT rate as follows:
Br. (12 x 1.25) x 4 hours = Br. 60

2. PAULOS
 OT Earning = 8 hours X Br. 2020 x 2 = Br. 202
160 hours

3. HAILE
 OT Earnings = 6 hours X Br. 2,950 x 2.5 = Br. 276.56
160 hours

GROSS EARNINGS
Gross Earnings = Basic salary + Allowance + OT Earnings
1. ZERFIE
 Gross Earnings = Br. 1,920 + Br. 200 + Br. 60 = Br. 2,180
 Remember taxable income in this case is Br. 1,980 because the transportation allowance
of Br. 200 is not subject to taxation.

2. PAULOS
 Gross Earning = Br. 2,020 + Br. 202 = Br. 2,222
 The Gross Total Earnings of Paulo’s consists of the Br. 2,020 basic salary plus the
overtime earnings of Br. 202, which is Br. 2,222.

3. LEMA
 Gross Total Earnings = Br. 5,300, which include the basic salary alone
4. TENSAY
 Gross Total Earnings = Br. 1,470, which is the basic salary.
5. HAILE
 Gross Total Earnings = Br. 2,950 + Br. 600 + 276.56 = Br. 3,826.56
 Remember taxable income in this case is Br. 3,826.56 because the transportation
allowance of Br. 600 is subject to taxation.

DEDUCTIONS AND NET PAY

1. ZERFIE:
 Gross Earnings = Br. 1,920 + Br. 200 + Br. 60 = Br. 2,180
 Gross Taxable Income (Br. 2,180 – Br. 200)--------------------Br.1,980

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 Employee income tax
600 x 0% = 0.00 Short cut method
1050 x 10% =105.00 (TI x 15%) -142.5
330 x 15 % = 49.5 or = (1,980 x 15%) -142.5
Total 1,980 154.5 = 297– 142.5
= 154.5
Pension contribution:
Basic salary x 7%
= 1920 x 7%
= Br. 134.4

Total deductions = Br. 154.5 + 134.4

= Br. 288.9
Net pay = Gross earnings – Total deductions
= Br. 2,180 – 288.9
Br. 1891.1

2. PAULOS: Short cut method

(TI x 15%) -142.5
 Gross Total Earning-----Br. 2,222.
= (2,222 x 15%) -142.5
 Employee Income tax = 333.3– 142.5
600 x 0% = 0.00 = 190.8
1050 x 10% =105.00
572 x 15 % = 85.8
Total Br. 2,222 190.8

Pension contributions
Basic salary * 7%
=2020 * 7% Other deductions
= Br. 141.4 Credit association Br. 300
Total Br.
300
Total deductions = Br. 190.8 + 141.4 + 300 =Br. 632.2

Net pay = Gross earning – Total deduction = Br. 2,222- 632.2 =Br. 1,589.8

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 3. LEMA:
 Gross Total Earnings------------------------------------Br. 5,300
 Employee Income Tax
600 x 0% = 0 Short cut method
1050 x 10% =105.00 (TI x 25%) - 565
1550 x 15% =232.50 = (5,300 x 25%) - 565
2050 X 20% = 410.00 = 1,325 - 565
50 X 25% = 12.50 = 760
Total Br. 5,300 Br. 760

Pension contribution
Basic salary X 7% Other deductions
= Br. 5,300*7% Donation Br. 200
Credit association 400
=Br. 371
Total Br. 600
Total deductions = Br. 760 + 371 + 600 = Br. 1,731

Net pay = Gross earning – Total deductions

=Br. 5,300 – 1,731 = Br. 3,569

4. TENSAY:
 Total Gross Earnings ------------------------------- Br. 1,470
 Employee income tax
Short cut method
600 x 0% = 0 (TI x 10%) - 60
870 x 10% =87.00 = (1,470x 10%) - 60
Total Br. 1,470 Br. 87 = 147- 60
= 87
Total deduction = Br. 87

Net pay = Gross total earning – total deduction

=Br. 1,470 – 87
=Br. 1,383

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 5. HAILE:
 Total Gross Earnings----------------Br. 3,826.56
 Employee income tax
Short cut method
600 x 0% = 0 (TI x 20%) – 302.5
1050 x 10% = 105.00 = (3,826.56 x 20%) – 302.5
1550 x 15% = 232.50 = 765.312 – 302.5
626.56 X 20% = 125.312 = 462.812
Total Br. 3,826.56 Br. 462.812

Other deductions
Total deduction = Br. 462.812 + 100
Donation Br. 100
= Br. 562.812 Total Br. 100

Net pay = Total Gross Earning – Total deductions

= Br. 3,826.56 – 562.812
= Br. 3,263.748

Note: Pension contribution deducted only when the employees are permanent to the organization.
In case, the employees are not permanent pension contribution is not calculated and deducted from
the employees.
PROVING THE PAYROLL:
Total Earnings:
Basic salary-----------------------------------------------Br. 13,660.00
Allowances--------------------------------------------------------800.00
Overtime-----------------------------------------------------------538.56
Grand Total------------------------------Br. 14,998.56
Deductions:
Employee Income Taxes---------------------------------Br. 1,655.112
Pension Contributions------------------------------------------646.80
Other Deductions----------------------------------------------1,000.00
Total Deductions----------------------------------Br. 3,301.912
Net Pay Total---------------------------------------------Br. 11,696.648
Total Deductions plus Net pays------------------------Br. 14,998.56

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 XYZ Agency
Payroll Register (sheet)
For the month of Yekatit, 2009 E.C
S. Name of Earnings Gross Deductions Total Net pay Sig
no employee Basic Allo Over Earning Income Pensio Othe deduct n.
salar wan time s tax n r
y ce cont. ded.
01 Zerfie Shewa 1,920 200 60 2,180 154.5 134.4 288.9 1,891.1
02 Paulos Chala 2,020 202 2,222 190.8 141.4 300 632.2 1,589.8
03 Lema kebie 5,300 5,300 760 371 600 1,731 3,569
04 Tensay Belay 1,470 1,470 87 87 1,383
05 Haile Taye 2,950 600 276.5 3,826.56 462.812 100 562.812 3,263.74
6 8
Total
13,66 800 538.5 14,998.5 1,655.11 646.8 1,000 3,301.91 11,696.6
0 6 6 2 2 48
Prepared by: _______________Checked by: ________________Approved by: ___________

b. Yekatit 30, 2014. Salary expense--------------14,998.56

Cash-----------------------------------------------11,696.748
Pension payable---------------------------------- 646.80
Income tax payable------------------------------1,655.112
Credit association payable------------------------700
Donation payable-----------------------------------300
c. Yekatit 30. Payroll tax expense-------------1,126.4
Pension payable ---------------------------------1,126.4
(11% x basic salary of all permanent employees)
d. Megabit 1. Credit association payable----------------700
Cash------------------------------------------------------700
e. Megabit 3. Donation payable-----------------------300
Cash-------------------------------------------300
f. Megabit 7. Pension payable---------------------646.80
Payroll tax payable----------------1,016.4
Employment tax payable---------1,655.112
Cash -------------------------------------------------3,318.312

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