In developing nations, farming is primarily subsistence, rain-dependent, not mechanized, and uninsured, making it subject to high crop losses caused by environmental and human factors. As a result, diversifying smallholder farmers’ livelihood strategies helps them achieve financial stability, combat poverty, provide job opportunities, reduce rural-urban migration, and cope with environmental and socioeconomic shocks. This study was conducted to assess livelihood diversification strategies and identify the factors that affect households’ decisions to diversify their livelihood strategies. It was carried out in Basona worana and Angolelana tera woreda of North Shewa in Ethiopia in 2021 using 201 randomly selected smallholder farmers. The descriptive result indicates that 33% of the households sampled diversify their livelihoods to on-farm and non-farm activities. 57% of the sample household engaged only in on-farm activities to sustain their life. The multinomial logistic regression model results showed that age, sex, formal education level, land ownership, livestock ownership, distance from the main road, access to stable food, and credit all significantly affected household livelihood diversification strategies. Raising awareness of livelihood diversification, avoiding bad traditional beliefs on some ignored jobs, creating access to credit, roads and markets, and promoting the crop-livestock mixed farming systems were the policy recommendations of this study.