Chapter 3 Payroll 2011 Edited
Chapter 3 Payroll 2011 Edited
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The Employee at the rate indicated under schedule A of the Proclamation No. 286/2002
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Method of Employment Income Tax computation
•The most widely used employment income tax computation methods
are progression and deduction.
A.Progression Method
•The amount of tax is calculated for each layer of tax bracket by
multiplying the given rate under schedule “A” for each additional layer.
•E.g. 3.1 Assume Ato Tolossa Tadesse earned an amount of Br. 5,275
subject to income tax; his employment tax is calculated using
progression method as follows.
• Earning x Tax Rate = Income Tax
600 - 0 = 600 x 0% = 0
1,650 - 600 = 1,050 x 10% = 105.0
3,200 - 1,650 = 1,550 x 15% =232.5
5,250 -3,200 = 2,050 x 20% = 410
5,275- 5,250 = 25 x 25% = 6.25
Total 5,275 753.75
B. Deduction Method
• In preparation of payroll most organizations used the
following short cut formula to compute employment
income tax.
• Income Tax = (Gross taxable Income x Tax Rate) -
Deductions
•E.g. 3.2 assume Ato Tolossa Tadesse earned an amount
of Br. 5,275 subject to income tax; his employment tax is
calculated using deduction method as follows.
•Income Tax = (Gross taxable Income x Tax Rate) - Deductions
• Income Tax = 5275 x 25% - 565
• = 1,318.75 - 565 = Br 753.75
•E.g. 3.3 Bahir Dar edible oil Factory pays the salary of its
employee’s according to the Ethiopian Calendar month to the
Federal Government Tax Authority.
•The forth coming data relates to the month of Yekatit, 2004.
S. Name of Basic Transport OT Duration of Basic
No.
AaaEmployee salary Allowance Hours OT Work Salary per
Aa Work Hour
01 Martha Feleke 4,800 900 10 Up to 10 pm 30
02Aa Alemu Mekonnen 1,920 -- 8 10 pm to 5 am 12
03Aa Selamu Bogale 2,400 -- 6 Weekly rest 15
days
04Aa Semia 2,160 600 -- -- 13.5
Aa Mohammed
05 Destaw Negash 1,440 100 10 Public holiday 9
Aa
A
• N.B. Note that management of the factory usually expects
a worker to work 40 hours in a week and during Yekatit
2004 all workers have done as they have been expected.
Besides, all workers of this factory are permanent
employees except Alemu Mekonnen; Selamu Bogale
agreed to have a monthly Br 300 be deducted and paid to
the Credit Association of the Factory as a monthly saving.
Income tax proclamation No. 286/2002 and directive
regulation No. 78/2002 Article 3/h/ states that
Transportation allowance exempted from tax payable for
employee and in any circumstance the amount of
transportation allowance exempted from tax must not be
more than birr 800 birr. If transportation allowance is
above ¼ of basic salary the excess amount should be
subjected to income tax.
•Required:
1.Prepare a payroll register sheet for the factory for the
month of Yekatit , 2004.
2.Record the payment of salary as of Yekatit 30, 2004 using
CK. No. 41 as a source document.
3.Record the payroll tax expense for the month of Yekatit,
2004 memorandum No. 10
4.Record the payment of the claim of the credit Association
of the Factory that arises from Yekatit’s payroll assuming
the payment is made on Megabit 1, 2004.
5.Assuming that the withholding taxes and payroll taxes of
the month of Yekatit, 2004 have been paid on Megabit 5,
2004 via CK. No. 50 record the required journal entry.
Solution
•1st Computing Overtime Earning:
•The overtime earning is calculated with the following
formula
•Overtime Earning = OT Hrs Worked x (Ordinary Hourly Rate x OT Rate)
Aaa
Employee
Aaa OT Hrs Worked x (Ordinary Overtime Earning
Name
Aaa Hourly Rate x OT Rate)
Aaa
Martha F 10hrs x (Br. 30 x 1.25) = Br. 375
Aa
Alemu
Aa M 8hrs x (Br. 12 x 1.5) = Br. 144
Selamu B 6hrs x (Br. 15 x 2) = Br. 180
Destaw N 10hrs x (Br. 9 x 2.5) = Br. 225
•2nd Computing Gross Earning
•Gross earning is calculated with the following formula:
•Gross Earning = Basic Salary + Allowance + OT Earning
Aaaaa Name
• Employee Basic Salary + Allowance + OT Earning = Gross Earning
Martha F Br. 4,800 + 900 + 375 = Br. 6,075
A M
• Alemu Br. 1,920 + 0 + 144 = Br. 2,064
aaa B
• Selamu Br. 2,400 + 0 + 180 = Br. 2,580
Semia M Br. 2,160 + 600 + 0 = Br. 2,760
Destaw N Br. 1,440 + 100 + 225 = Br. 1,765
•3rd Computing Deductions and Net pays:
Martha F.
Gross Earning = Br. 6,075 Pension Contribution (PC) =
Gross Inc. for tax =6,075-800 = Br. 5,275 Basic Salary x 7%
or Br. 4,800 x 7% = Br. 336
Total deduction = IT + PC
(4,800+100+375 = 5,275)
= Br. 753.75 + 336
Income Tax (IT) = 5,275x25% - 565 = Br. 1,089.75
= 1,318.75 – 565 Net Pay = Gross income-Total Deduction +
= Br 753.75 Allowance
= (5,275 – 1,089.75) +800
= Br. 4,985.25
Alemu M.
Aaaa
• Gross Earning = Br. 2,064 Total deduction = IT + PC
Income Tax (IT) = 2,064 x 15% - 142.5 = Br. 167.1 + 0
= 309.6 – 142.5 = Br. 167.1
Net Pay = Gross income-Total Deduction
= Br 167.1
+ Allowance
Pension Contribution (PC): Pension
= 2,064 – 167.1 + 0
contribution is zero as he is a = Br. 1,896.9
contractual worker PC = 0
Selamu B.
Gross Earning = Br. 2,580 - Credit Asso. Pmt: Br. 300
Income Tax (IT) = 2,580 x 15% - Total deduction = IT + PC + Credit Asso. Pmt.
142.5 = Br. 244.5 + 168 + 300
= Br. 712.5
= 387 – 142.5
Net Pay = Gross income-Total Deduction +
= Br 244.5
Allowance
Pension Contribution (PC) = 2,580– 712.5
Basic Salary x 7% = Br. 1,854.9
Br. 2,400 x 7% = Br. 168
Semia M.
Gross Earning = Br. 2,760 Pension Contribution (PC)
Non-taxable transport allowance is 1/4th of basic Basic Salary x 7%
salary: 0.25 x 2,160 = 540 Br. 2,160 x 7% = Br. 151.2
Total deduction = IT + PC
Gross Income for tax calculation2,760-540 = Br 2,220
= Br. 190.5 + 151.2 = Br. 341.7
Or basic salary + taxable transport allowance Net Pay = Gross income-Total Deduction +
2,160 + 60 = 2,220 Allowance
Income Tax (IT) = 2,220 x 15% - 142.5 = (2,220 – 341.7) +540
= 333 – 142.5 = Br 190.5 = Br. 2,418.3
Destaw N.
Gross Earning = Br. 1,765 Total deduction = IT + PC
Gross Inc. for tax = 1,765-100 = Br. 107.25 + 100.8
= Br. 1,665 = Br. 208.05
Income Tax (IT) = 1,665 x 15% - 142.5 Net Pay = Gross income-Total Deduction +
= 249.75–142.5 Allowance
= Br 107.25 = (1,665 – 208.05) +100
Pension Contribution (PC) = Br. 1,556.95
Basic Salary x 7%
Br. 1,440 x 7% = Br. 100.8
1.Preparation of Payroll Register
• Bahir Dar edible Oil Factory
• For the Month of Yekatit
pay Date: Yekatit 30, 2004 E.C
S. Name of Earnings Gross Deduction Total Net Pay
No Employee
Aaa (total) Deductio
Aaa Earnin n
Basic Transport Overtim g Employee Pension Other Si
Deduction
Aaa salary Allowance e Income Deducti g.
Tax on
Aaa
01 Martha F 4,800 900 375 6,075 753.75 336 -- 1,089.75 4,985.2
Aa
5
02 Alemu
Aa M 1,920 -- 144 2,064 167.1 -- -- 167.1 1,896.9
0
03 Selamu
Aa B 2,400 -- 180 2,580 244.5 168 300 712.5 1,867.5
0
Aa
04 Semia M 2,160 600 -- 2,760 190.5 151.2 -- 341.7 2,418.3
Aa 0
05 Destaw N 1,440 100 225 1,765 107.25 100.8 -- 208.05 1,556.9
Aaaa 5
Total 12,72 1,600 924 15,244 1,463.10 756.00 300 2,519.10 12,724.
Aaa 0 90
2. Recording the payment of salary
Yekatit 30, Salary Expense ………….. 15,244
2004 Employee Income Tax Payable … 1,463.10
Pension Contribution Payable …. 756.00
Credit Association …………. 300
Cash ………………………… 12,724.90
3. Recording the payroll Taxes Expense for Yekatit , 2004
Payroll Tax expense = Total Basic Salary of all permanent
Employees X 11%
= (4,800 + 2,400 + 2,160 + 1,440) X 11% = 10,800x0.11 = Br.
1,188
Payroll Taxes Expenses …………. 1,188
Pension Contribution Payable ……1,188
4. Recording the payment of withholding and payroll taxes to the Inland
Revenue Administration on Megabit 1, 2004:
Employee Pension Contribution
Income tax payable payable
1,463.10 (2) 756.00 (2)
1,188.00 (3)
1,463.10 1,944.00
•
Employee income tax: …………… Br. 1,463.10
Plus: pension contribution ………...Br. 1,944.00
Total …………………………. Br. 3,407.10