<p>Participatory forest management (PFM) was introduced in Ethiopia to address deforestation while enhancing rural livelihoods through participatory forest governance. This study examines the contribution of PFM to household income, the determinants of household dependence on forest resources, and the challenges limiting its scalability in northeastern Ethiopia. A mixed-methods approach was employed, integrating qualitative insights with quantitative data from 121 households using a multi-stage sampling design. Findings reveal that PFM contributes 24.8% at the household level and 14.2% of aggregate annual household income, with a mean annual income of 3288.68 Ethiopian birr (US$ 20.6), indicating its role as a significant but supplementary livelihood source. Dependence on PFM varies across wealth groups, with poor households deriving a larger share of their income from forest resources, highlighting its function as a safety net. The overall model was statistically significant (Wald x² = 106.49, <i>P</i> &lt; 0.001). Fractional logit regression model showed that livestock ownership, crop income, and income from casual labor significantly influence household reliance on PFM. Livestock ownership (dy/dx = − 0.2807) and income from casual labor (dy/dx = − 0.0000597) were negatively affected dependence on PFM income, while crop income had a positive effect, suggesting that forest resources complement agricultural livelihoods. However, weak legal frameworks, limited government commitment, and inequitable benefit-sharing mechanism constrain the expansion and effectiveness of PFM in study area. Household dependence on PFM income is mainly influenced by livelihood asset and alternative income opportunities rather than demographic factors. Strengthening institutions, improving benefit sharing, and promoting livelihood diversification enhance PFM effectiveness and scalability.</p>