Payroll for a shop with six staff: what the law actually requires
Payroll is the part of running a shop where a small misunderstanding compounds monthly and surfaces at an audit. This is one payslip, worked all the way through, with the instrument behind each line named.
The brackets
Employment income tax runs on six progressive monthly bands. The Income Tax (Amendment) Proclamation No. 1395/2025 reshaped them and tripled the tax-free threshold from ETB 600 to ETB 2,000 a month.
| Monthly income (ETB) | Rate |
|---|---|
| 0 – 2,000 | 0% |
| 2,001 – 4,000 | 15% |
| 4,001 – 7,000 | 20% |
| 7,001 – 10,000 | 25% |
| 10,001 – 14,000 | 30% |
| Above 14,000 | 35% |
One payslip, worked
Take a shop supervisor on a gross monthly salary of ETB 12,000. The tax is computed band by band, not by applying a single rate to the whole salary.
| Band | Amount in band | Rate | Tax |
|---|---|---|---|
| 0 – 2,000 | 2,000 | 0% | 0.00 |
| 2,001 – 4,000 | 2,000 | 15% | 300.00 |
| 4,001 – 7,000 | 3,000 | 20% | 600.00 |
| 7,001 – 10,000 | 3,000 | 25% | 750.00 |
| 10,001 – 12,000 | 2,000 | 30% | 600.00 |
| Total PAYE | 12,000 | — | 2,250.00 |
So PAYE is ETB 2,250 — an effective rate of 18.75%, not the 30% of the top band she touches. Then pension. Under the Private Organization Employees Pension Proclamation No. 715/2011, the contribution schedule phased in to 7% from the employee and 11% from the employer.
| Line | Amount (ETB) |
|---|---|
| Gross salary | 12,000.00 |
| Less PAYE | (2,250.00) |
| Less employee pension at 7% | (840.00) |
| Net pay to the employee | 8,910.00 |
| Employer pension at 11% | 1,320.00 |
| Total cost to the business | 13,320.00 |
The mistake almost everyone makes
Pension contributions do not reduce the PAYE base. Both are computed on full gross pay. It is tempting to deduct the 7% first and tax what is left — several neighbouring jurisdictions work that way — but here that understates the tax on every payslip you produce.
On the salary above, netting pension off first would give a base of 11,160 and PAYE of 1,998 instead of 2,250 — an under-deduction of 252 birr a month, per employee, accruing quietly until someone reconciles it.
Overtime, at four different rates
The Labour Proclamation No. 1156/2019 sets a normal working week of 48 hours over an 8-hour day, and prices overtime by when it falls.
| When the hours fall | Multiplier |
|---|---|
| Daytime overtime | 1.5× |
| Night, 10pm to 6am | 1.75× |
| A weekly rest day | 2× |
| A public holiday | 2.5× |
Overtime is capped at 4 hours a day and 12 hours a week. A shop that rosters a Sunday shift as ordinary time and a public holiday at time-and-a-half is underpaying against both the 2× and 2.5× rates — and the roster is the evidence.
Leave, and filing
Annual leave starts at a minimum of 14 working days in the first year and accrues with length of service. PAYE is filed and paid monthly, and the deadline commonly given is the 8th of the following month — confirm the current date with your own tax office, since administrative deadlines move more often than rates do.
None of this is complicated arithmetic. What makes payroll hard in a six-person shop is that the roster, the attendance record and the payslip live in three different places, and the payslip is the only one anybody checks.
Sources
- What's Changed under Ethiopia's New Income Tax (Amendment) Proclamation No. 1395/2025Chambers and Partners
- Income Tax (Amendment) Proclamation No. 1395/2025, EthiopiaKPMG
- Private Organization Employees Pension Proclamation No. 715/2011International Labour Organization (NATLEX)
- Ethiopia's New Labour Proclamation — Highlights of Key Changes (No. 1156/2019)Mesfin Tafesse & Associates
Figures on this site are attributed to the organisation that published them, with a link. Where sources disagree, we say so rather than choosing the flattering number.