Payroll and Employment Taxes in Israel

Overview of Payroll Taxes in Israel

Navigating Israel's payroll tax system requires attention to detail whether you're running a small business or managing a large enterprise. Israeli employers must comply with several mandatory contributions including income tax withholding, National Insurance (Bituach Leumi), health insurance, and pension contributions. The system features progressive income tax rates ranging from 10% to 47%, alongside employer contributions that can total over 20% of an employee's salary. Non-compliance risks include substantial penalties, interest charges, and potential legal action from tax authorities, not to mention damaged employee relations.

This article aims to guide you through the key aspects of Israeli payroll taxes, including calculation methods, submission deadlines, and proper filing procedures. Requirements may vary based on employee income levels, with different contribution rates applying to different salary brackets, making it essential to stay informed about the latest regulations.

Fiscal Year in Israel

1 January - 31 December is the 12-month accounting period that businesses in Israel use for financial and tax reporting purposes.

Payroll Cycle in Israel

The payroll cycle in Israel is usually monthly, with employees being paid by the 9th of the following month.

Minimum Wage in Israel

As of April 1, 2025, Israel's minimum wage rates are as follows:

• Monthly Minimum Wage: ₪6,247.67
• Hourly Minimum Wage: ₪34.32

These rates reflect a 6.25% increase from the previous rates, effective April 1, 2025, as announced by Labor Minister Yoav Ben-Tzur. The increase aims to support workers amid ongoing cost-of-living challenges and aligns with the government's commitment to improving workers' purchasing power.

Bonus Payments in Israel

It is not a legal obligation in Israel to provide 13th-month salary.

How is Payroll Calculated in Israel?

Payroll calculation in Israel involves several components that affect both employer costs and employee take-home pay. The process begins with the gross salary as specified in the employment contract, which serves as the basis for all calculations.

First, employers must calculate income tax withholding using Israel's progressive tax brackets, which range from 10% for lower incomes to 47% for higher earners. Tax credits (nekudot zikui) reduce the tax liability based on personal circumstances such as marital status and number of children.

Next, mandatory deductions include National Insurance (Bituach Leumi) and health insurance, with tiered rates based on income levels. For salaries up to 7,522 ILS, employees contribute 4.27% and employers 4.51%. For income between 7,522 ILS and the maximum threshold of 50,695 ILS, higher rates apply: 12.16% for employees and 7.6% for employers.

Pension contributions are also mandatory, with employers contributing a minimum of 6.5% for the pension component and 8.33% for severance pay, while employees contribute 6% of their salary.

Additional components may include transportation allowances, meal subsidies, and other benefits, each with specific tax implications. The final net salary is calculated by subtracting all employee contributions and tax withholdings from the gross salary.

Types of Payroll Taxes in Israel

Israel's payroll tax system encompasses several distinct components, each with its own regulations and compliance requirements. Employers must understand and properly manage these various taxes to remain compliant with Israeli law and avoid penalties.

Income Tax

Income tax in Israel follows a progressive system with rates ranging from 10% to 47% depending on income level. For monthly salaries, the 2025 brackets start at 10% for income up to 7,010 ILS, increasing to 14% for income between 7,011-10,060 ILS, and ultimately reaching 47% for income above 46,691 ILS. Employers are responsible for withholding the correct amount from employee salaries and remitting it to the Israeli Tax Authority (ITA).

Tax credits (nekudot zikui) reduce tax liability based on personal circumstances such as residency status, marital status, and number of children. Income tax must be reported and paid monthly by the 15th of the following month, with an annual reconciliation filing required by April 30th. Penalties for late payment or incorrect withholding can reach 4% monthly interest plus linkage to the Consumer Price Index.

National Insurance (Bituach Leumi)

National Insurance, known locally as Bituach Leumi, is Israel's social security system that funds healthcare, pensions, maternity leave, disability benefits, and unemployment support. Contribution rates are tiered based on income levels. For monthly salaries up to 7,522 ILS, employees contribute 1.04% while employers contribute 4.51%. For income above this threshold (up to the maximum of 50,695 ILS), employees contribute 7% and employers 7.6%. No additional contributions are required for income exceeding the maximum threshold.

These contributions must be reported and paid monthly by the 15th of the following month. National Insurance is mandatory for all employees in Israel, with special rules applying to certain groups including foreign residents, new immigrants, and pensioners. Late payments incur penalties of 0.5% for each week of delay, plus linkage to the Consumer Price Index.

Pension and Severance Contributions

Israel mandates employer and employee contributions to pension funds, providing retirement security and severance protection. Employers must contribute a minimum of 6.5% of salary toward pension savings and 8.33% toward severance pay (pitzuim), totaling 14.83%. Employees must contribute at least 6% of their salary to the pension component. These contributions are typically made to employee-selected pension providers from a list of government-approved funds. Pension contributions are tax-deductible and must be transferred to the relevant pension funds by the 15th of the month following the salary payment.

Employees become entitled to their pension savings according to the terms of their specific pension plan, while severance pay typically vests after one year of employment. Non-compliance with pension contribution requirements can result in financial penalties and potential legal action from employees or regulatory authorities.

How to Set Up a Payroll in Israel?

Registering with Israeli Authorities

Setting up payroll in Israel requires registration with several government authorities. First, register your business with the Israeli Tax Authority (ITA) to obtain a tax withholding file (tik nikuyim) by submitting form 4436. This registration allows you to withhold income tax from employee salaries.

Next, register with the National Insurance Institute (Bituach Leumi) by completing form BL/1, which establishes your employer file for social security contributions. You'll need to provide your company registration documents, identification of company officers, and details about your business activities.

For pension arrangements, while there's no central registration requirement, you must establish relationships with pension providers chosen by your employees or select a default provider if employees don't specify a preference.

If you plan to employ foreign workers, additional registration with the Population and Immigration Authority may be required, along with work permit applications.

All registrations can be completed online through the respective authority websites or in person at their offices. Processing typically takes 1-2 weeks, so plan accordingly before your first payroll cycle.

Choosing a Payroll System

Selecting the right payroll system is crucial for managing Israeli payroll efficiently and compliantly. The complex tax brackets and multiple contribution types make automated solutions particularly valuable in this market.

When evaluating payroll systems for Israel, consider options that specifically support the country's unique requirements, including progressive tax calculations, National Insurance tiers, and pension contribution tracking. Your choices include:

 
• Local Israeli payroll software designed specifically for the Israeli market
 
• International payroll platforms with strong Israel-specific functionality
 
• Playroll, which offers comprehensive Israeli payroll processing with automatic tax calculations and reporting capabilities
 
• Integrated ERP systems with payroll modules customized for Israel
 
• Outsourced payroll services through local accounting firms or payroll providers

Look for systems that automatically update with regulatory changes, support Hebrew interfaces if needed, and provide compliant payslips and reporting formats. The ideal solution should also integrate with popular Israeli pension providers to streamline contribution payments.

Onboarding Employees for Payroll

Proper employee onboarding is essential for accurate payroll processing in Israel. When hiring new employees, collect the following documentation:

 
• Israeli ID card (teudat zehut) or passport for foreign workers
 
• Completed tax withholding form (tofes 101), which includes personal details and tax credit information
 
• Bank account details for salary transfers
 
• Pension fund selection form indicating the employee's chosen pension provider
 
• Previous employment certificates if applicable for tax continuity

Store these documents securely in compliance with Israeli privacy laws. The tofes 101 form must be updated annually at the beginning of each tax year, even for existing employees. For foreign workers, additional documentation such as work permits and visa information must be maintained. Establishing a clear onboarding checklist ensures you collect all necessary information before the first payroll run.

Step-by-Step Payroll Processing in Israel

Collecting Timesheets and Attendance Data

Accurate time tracking is fundamental to Israeli payroll processing, as labor laws strictly regulate working hours and overtime compensation. Israeli employers must maintain detailed records of employee attendance, including start and end times, breaks, and overtime hours. These records must be kept for at least seven years according to Israeli labor regulations.

Time tracking methods range from traditional paper timesheets to digital time clocks and sophisticated attendance software. Many Israeli companies now use biometric systems or mobile apps that allow employees to clock in and out remotely. Whatever system you choose, ensure it captures overtime hours separately, as these are subject to premium pay rates (125% for the first two overtime hours and 150% thereafter).

Calculating Salaries and Deductions

Calculating Israeli payroll requires attention to several components:

 
• Start with the employee's gross salary as defined in their employment contract
 
• Calculate income tax withholding using the progressive tax brackets (10-47%) and applying relevant tax credits
 
• Determine National Insurance and health insurance contributions based on the tiered rates (different rates for income up to 7,522 ILS and income between 7,522-50,695 ILS)
 
• Calculate mandatory pension contributions (6% employee contribution, 6.5% employer pension contribution, and 8.33% employer severance contribution)
 
• Add any additional payments such as overtime (calculated at premium rates), transportation allowance, or bonuses
 
• Deduct any employee-authorized deductions such as additional pension contributions or loan repayments

The final calculation should clearly separate the employee's gross salary, all deductions, and the resulting net salary. Israeli payroll software typically automates these calculations, but regular verification is recommended, especially when tax brackets or contribution rates change.

Generating and Distributing Payslips

Israeli law requires employers to provide detailed payslips (tlush sachar) to all employees. These payslips must include specific information: employee and employer details, salary period, regular and overtime hours worked, gross salary, itemized deductions, employer contributions, and net salary. Additional required elements include accumulated vacation days, sick leave balance, and severance pay accrual.

Payslips can be distributed either electronically or in paper format. Electronic distribution requires secure access methods and employee consent. Many Israeli employers use payroll systems that generate password-protected PDF payslips delivered via email or accessible through employee portals.

Payslips must be provided no later than the 9th of the month following the salary month. They must be in Hebrew, though additional languages may be included. Employers should maintain copies of all payslips for at least seven years to comply with record-keeping requirements.

Submitting Payroll to Authorities

Israeli employers must submit regular payroll reports to several authorities:

 
• Israeli Tax Authority (ITA): Monthly withholding tax reports (form 102) must be submitted online through the Shaam system by the 15th of the following month, detailing income tax and National Insurance withholdings for each employee.
 
• National Insurance Institute: While the form 102 includes National Insurance information, additional quarterly reports may be required for specific employee categories.
 
• Pension Providers: Monthly contribution reports must be submitted to each relevant pension provider along with the corresponding payments.
 
• Annual Reporting: By April 30th each year, employers must submit annual tax reconciliation reports (form 126) summarizing all employee compensation and tax withholdings for the previous year.

Most submissions are now required electronically through the authorities' online portals. Maintaining accurate records throughout the year simplifies these reporting processes and helps avoid errors that could trigger audits or penalties.

Paying Employees

Israeli employers typically pay employees monthly, with salaries due by the 9th of the following month at the latest. Some industries and collective agreements may specify earlier payment dates or additional payment frequencies.

The most common payment methods in Israel include:

 
• Direct bank transfers (ma'avar bankai) - the standard and preferred method
 
• Checks - less common but still used by some smaller businesses
 
• Cash payments - generally discouraged and subject to stricter reporting requirements

Employers must provide advance notice of any changes to payment dates or methods. For new employees, the first salary payment may be prorated based on their start date within the month. Israeli law also requires employers to maintain records of all salary payments for at least seven years, including payment dates, amounts, and methods.

How to Submit Payroll Tax in Israel

 
• Online submission through the Israeli Tax Authority's Shaam system - The primary and recommended method for submitting form 102 (monthly withholding tax report) and form 126 (annual report)
 
• Direct debit arrangements with the tax authority and National Insurance Institute - Allows automatic withdrawal of tax and insurance payments from the company's bank account
 
• Bank transfers with appropriate reference numbers - Must include the company's file number and reporting period
 
• Payment vouchers at postal bank branches - Available for employers without online access, though increasingly uncommon
 
• Through certified accountants or payroll providers with power of attorney - Useful for businesses outsourcing their payroll functions

Payroll Tax Due Dates in Israel

Payroll Contributions in Israel

Understanding the tax obligations for both employers and employees is crucial when operating in Israel's business landscape. This section explains how taxes and statutory fees affect payroll and individual earnings in Israel.

Employer Tax Contributions

Employer payroll contributions are generally estimated at an additional 21.78% on top of the employee salary in Israel.

Employee Payroll Tax Contributions

In Israel , the typical estimation for employee payroll contributions cost is around 21.1%.

Individual Income Tax Contributions

In Israel, individual income tax rates vary from 10% to 50% and is subject to annual adjustments. The calculation follows progressive rates, and factors like marital status and the number of children can impact the overall tax rates.

Pension in Israel

Employees aged 20 and above contribute 18.5% to pension insurance (6% from the employee, 12.5% from the employer). To qualify for the old-age retirement pension, individuals must reach retirement age (67 years for men; 62-65 years for women), pass an income test, and have had continuous employer insurance contributions.

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Managing Common Payroll Challenges in Israel

Global employers operating in Israel often encounter unique payroll challenges that can affect compliance and efficiency, like navigating evolving tax laws and managing employee data. With a need for real-time accuracy, modern organizations must develop strategies to overcome these challenges effectively. Below, we explore some of the most common payroll hurdles and provide actionable solutions to streamline payroll processes in Israel.

Maintaining Accurate and Detailed Payroll Reports

Maintaining accurate global payroll reports is often challenging due to currency exchange complexities, data integration issues, and the need to keep employee information up-to-date – including tax information, hours worked, leave balances, and any changes in salary or job status. Generating accurate reports is easy with a comprehensive payroll automation tool that consolidates fragmented data sources, and can keep track of employee payments and deductions.

Keeping Up With Ever-Changing Tax Laws & Compliance Laws

In Israel, tax laws and compliance regulations can change frequently, presenting a significant challenge for global employers. Monitoring updates to federal, state, and local tax codes is crucial to avoid non-compliance and costly penalties, but requires significant time and resources. Partnering with local experts or a reputable global HR platform is an effective way to maintain compliance. These services can help employers stay compliant with evolving regulations while freeing up time for more strategic work.

Consolidating Multi-Vendor Payroll Analytics

Managing payroll across multiple vendors often leads to fragmented data and inefficiencies, making it difficult to consolidate analytics. These challenges can hinder decision-making, especially when trying to gain a clear view of workforce costs and trends. To address this, organizations can invest in a centralized payroll management system that unifies data from multiple vendors. A consolidated platform simplifies payroll tracking, ensures data accuracy, and provides actionable insights into payroll expenditures.

Integrating Multiple HR & Payroll Systems

Global companies are prone to using multiple HR or payroll systems across regions, which can easily lead to fragmented payroll data, increasing the risk of delays and errors in employee compensation. To combat this, seamless integration between payroll and other systems is critical.

Payroll management systems that connect with existing HR and financial platforms can help streamline workflows by reducing manual inputs and ensuring that all departments operate with up-to-date, accurate information. In turn, this helps guarantee on-time, accurate payroll, boosting employee satisfaction.

What Does a Global Payroll Management Platform Cover?

A global payroll management platform is a software solution designed to streamline and automate the payroll processes for organizations with employees across multiple countries. It helps ensure accurate and timely payment while maintaining compliance with legal and regulatory requirements in Israel.

Key functions of a payroll management platform can include:

• Consolidate payroll data: Streamline fragmented payroll data into one source of truth when you’re operating in multiple regions.
   
• Analytics and reporting: Advanced capabilities to analyze payroll data and generate automated reports per region.
   
• Monitor and standardize payroll: Get an accurate view of employee costs, bonuses, and taxes per region, catch variances, and standardize payroll processes across regions to minimize errors.
   
• Compliance and record-keeping: Maintains accurate payroll records and ensures adherence to labor laws and regulations, reducing the risk of legal issues.
   
• Employee self-service: Provides portals where employees can access pay stubs, update personal information, and manage benefits selections.

How Playroll Can Streamline Payroll & Taxes in Israel

Expanding globally is an exciting milestone for any company, but it comes coupled with complex payroll challenges. It doesn’t have to be complicated. At Playroll, our easy-to-implement global payroll management software combines automation with hands-on support to make global payroll truly simple. Here's how Playroll helps:

• Multi-Vendor Integration: Our platform syncs seamlessly with your providers and in-house systems to unify global payroll services in one platform.
   
• Standardize Payroll Processes: Unify your operations in one dashboard to ensure payroll is running smoothly globally, with advanced approval flows and reports.
   
• Improve Governance & Compliance: Improve compliance by centralizing all your compliance tasks and processes. Easily track your payment obligations, with digitized audit trails.
   
• Advanced Reporting: Access and configure your data, your way, with a comprehensive suite of payroll analytics and reporting tools.