How Do You Pay Remote Employees in Israel?

Step-by-Step Process for Paying Remote Employees in Israel

1. Verify that the worker is correctly classified as an employee (not an independent contractor) under the Israeli Ministry of Labor guidelines.
2. Register your company with the Israeli Tax Authority to obtain a tax withholding file number for payroll purposes.
3. Open a local bank account to facilitate payments in Israeli New Shekel (ILS) and comply with local banking regulations.
4. Collect required documentation, including the employee's Teudat Zehut (ID card), bank details, and signed employment contract.
5. Set a compliant pay schedule based on Israeli labor laws, which typically require monthly payments.
6. Process payroll ensuring correct deductions for income tax, National Insurance Institute (NII) contributions, and health insurance.
7. Pay employees via compliant methods such as bank transfer and issue itemized payslips as required by Israeli law.
8. Remit withheld taxes and contributions to the Israeli Tax Authority and the National Insurance Institute on a monthly basis.
9. File annual tax returns and reports with the Israeli Tax Authority, including Form 126 for employee income and tax details.
10. Issue annual salary statements to employees by the end of February each year, detailing earnings and deductions.

What Are The Legal Ways To Pay Israel-Based Employees From Another Country?

Local Bank Transfer

• Best for: Employers with a registered Israeli entity paying employees via domestic bank transfers in ILS.
• Pros: Cost-effective, secure, and widely accepted by Israeli employees and banks.
• Limitations: Requires Israeli bank accounts and tax registrations; cross-border funding may introduce FX costs.
• Compliance note: Payroll must comply with Israeli Tax Authority rules and labor laws; wages must be paid in ILS and reported under Israeli systems.

Direct Payroll Services

• Best for: Companies with an Israeli entity that want to outsource payroll calculations, filings, and compliance.
• Pros: Ensures accurate tax withholding, automated filings with the Israeli Tax Authority, and reduces administrative burden.
• Limitations: Still requires entity setup, tax registrations, and oversight of compliance.
• Compliance note: Subject to Israeli tax regulations; no restrictions on paying in ILS, but strict reporting and deposit schedules apply. Playroll's Global Payroll services manage this end-to-end.

Employer of Record Platform Disbursement

• Best for: Foreign companies hiring Israel-based employees without establishing a local entity.
• Pros: The EOR becomes the legal employer, handling payroll, tax filings, benefits, and compliance with Israeli authorities.
• Limitations: Higher cost than direct payroll and less direct control over employment contracts.
• Compliance note: EOR providers manage registration, tax remittance, and reporting obligations with the Israeli Tax Authority and labor departments. Explore Playroll's Employer of Record services.

Contractor Payment Platforms

• Best for: Paying Israel-based independent contractors for project-based or flexible work arrangements.
• Pros: Simplified onboarding, cross-border payments, and reduced administrative overhead.
• Limitations: Does not cover employee benefits, tax withholding, or labor law protections; higher misclassification risk.
• Compliance note: The Israeli Tax Authority enforces strict classification rules; contractor platforms do not assume employer obligations. Explore Playroll's Contractor Management Platform.

What Taxes Do I Need To Handle for Israel Employees?

• Income Tax (Israeli Tax Authority): Withheld from employee wages based on progressive rates ranging from 10% to 50%.
• National Insurance Institute (NII) Contributions: 3.5% employee and 7.6% employer contributions for social security and health insurance.
• Health Insurance Tax: Included in NII contributions, covering employee health benefits.
• VAT (Value Added Tax): Generally not applicable to payroll but relevant for business operations at 17%.

Use Playroll's payroll tax calculator to estimate your total employer costs in Israel.

What Are the Biggest Compliance Risks When Paying Employees in Israel?

• Worker misclassification (Israeli Tax Authority): Misclassifying employees as contractors can result in back taxes, penalties, and liability for unpaid benefits under Israeli law.
• Payroll tax deposit errors (Israeli Tax Authority): Late or incorrect deposits can incur penalties of up to 15% of the unpaid amount.
• Permanent establishment risk (Israeli Tax Authority): Employing workers in Israel may create taxable presence for foreign companies, triggering corporate tax obligations.
• Late filings and reporting penalties (Israeli Tax Authority): Missing deadlines for tax returns or employee statements can result in fines per form, escalating with delay duration.
• Wage law violations (Ministry of Labor): Non-compliance with minimum wage, overtime, or other labor laws can lead to back pay claims and civil penalties.
• Social security contribution errors (National Insurance Institute): Incorrect contributions can result in penalties and additional liabilities for both employer and employee.

Pay Your Remote Employees in Israel

Pay your remote employees compliantly in Israel, without the heavy lifting. We support local payroll where you have your own entity or for international hires with Playroll’s EOR services.

• Accurate payroll processing: Gross-to-net processing, compliant payslips, and on-time payments — aligned with monthly pay frequency requirements and itemized payslip obligations under Israeli labor laws.
• Taxes & contributions covered: Registrations, filings, and remittances to the Israeli Tax Authority and National Insurance Institute across all relevant jurisdictions.
• Built for local compliance: We handle statutory obligations and year-end reporting, including annual salary statements and Form 126 filings in Israel.

Book a demo to run payroll in Israel with confidence.