Israel operates a progressive tax system encompassing income tax, social security contributions, and health tax. Employers play a crucial role in this system by withholding taxes and contributions from employee salaries and remitting them to the relevant authorities, primarily the Israel Tax Authority (ITA) and the National Insurance Institute (Bituah Leumi). Understanding these obligations is essential for compliance and smooth payroll operations when employing individuals in Israel.
Managing payroll and tax compliance in Israel involves navigating specific requirements for both employers and employees. Employers are responsible for calculating and remitting various taxes and contributions based on employee earnings, while employees benefit from certain deductions and allowances that reduce their overall tax burden.
Employer Social Security and Payroll Tax Obligations
Employers in Israel are required to contribute to the National Insurance Institute (Bituah Leumi) and the Health Tax system on behalf of their employees. These contributions are calculated as a percentage of the employee's gross salary, up to a certain income ceiling. The rates are tiered, with lower rates applied to income up to a specific threshold (typically around 60% of the average wage) and higher rates applied to income above that threshold, up to the maximum contribution ceiling.
Employer Bituah Leumi and Health Tax Contribution Rates (Applicable for 2025, based on current structure):
| Income Level | Bituah Leumi Rate | Health Tax Rate | Total Employer Rate |
|---|---|---|---|
| Up to ~60% of Average Wage | ~3.55% | ~3.10% | ~6.65% |
| Above ~60% of Average Wage up to Ceiling | ~7.60% | ~5.00% | ~12.60% |
Note: The exact income thresholds and rates are subject to annual adjustments.
Employers must also withhold the employee's portion of Bituah Leumi and Health Tax contributions from their salary.
Employee Bituah Leumi and Health Tax Contribution Rates (Applicable for 2025, based on current structure):
| Income Level | Bituah Leumi Rate | Health Tax Rate | Total Employee Rate |
|---|---|---|---|
| Up to ~60% of Average Wage | ~0.40% | ~3.10% | ~3.50% |
| Above ~60% of Average Wage up to Ceiling | ~7.00% | ~5.00% | ~12.00% |
The employer is responsible for remitting both the employer and employee portions to Bituah Leumi monthly.
Income Tax Withholding Requirements
Employers are legally obligated to withhold income tax (Mas Hachnasa) from their employees' monthly salaries based on the progressive tax brackets and the employee's personal circumstances, as reflected in their tax credits (Nekudot Zikui) and any approved deductions. The amount of tax withheld is calculated monthly based on the employee's gross income for that month.
Israeli Income Tax Brackets (Applicable for 2025, based on current structure):
| Monthly Income (NIS) | Tax Rate |
|---|---|
| 0 - ~7,120 | 10% |
| ~7,121 - ~10,810 | 14% |
| ~10,811 - ~17,340 | 20% |
| ~17,341 - ~24,150 | 31% |
| ~24,151 - ~50,210 | 35% |
| ~50,211 - ~65,360 | 47% |
| Above ~65,360 | 50% |
Note: An additional tax (Yasak Mas) of 3% is levied on annual income exceeding a high threshold (approximately NIS 698,280 per year or NIS 58,190 per month for 2024, subject to 2025 adjustment).
Employers must obtain a tax coordination form (Form 101) from each employee to determine the correct amount of tax credits and deductions to apply for withholding purposes.
Employee Tax Deductions and Allowances
Employees in Israel benefit from a system of tax credits (Nekudot Zikui) and potential deductions that reduce their taxable income and, consequently, the amount of income tax withheld. Each tax credit point has a monetary value that is deducted from the calculated tax liability.
Common Tax Credits (Nekudot Zikui) include:
- Israeli Resident Credit: All Israeli residents are entitled to 2.25 credit points.
- Working Woman Credit: Working women receive an additional 0.5 credit points.
- Child Credits: Credits are granted for children, varying based on the child's age and the parent's circumstances (e.g., number of children, single parent status).
- Credits for Higher Education: Available for individuals pursuing academic studies.
- Credits for New Immigrants (Olim Hadashim): Granted for a limited period after immigration.
- Credits for Single Parents: Additional credits for single-parent families.
- Credits for Demobilized Soldiers: Granted for a period after completing military service.
Employees may also be eligible for deductions from their gross income before tax calculation for items such as:
- Contributions to approved pension funds and provident funds (Kupat Gemel).
- Contributions to study funds (Keren Hishtalmut), subject to certain conditions and ceilings.
- Donations to approved institutions.
Employees must declare their eligibility for credits and deductions on Form 101 and provide supporting documentation to the employer.
Tax Compliance and Reporting Deadlines
Employers in Israel have strict monthly and annual reporting obligations to the Israel Tax Authority and Bituah Leumi.
- Monthly Reporting (Form 102): Employers must file a monthly report (Form 102) detailing the total salaries paid, taxes and contributions withheld, and employer contributions for all employees. This report is typically due by the 15th of the following month. Payment of the withheld taxes and contributions is also due by this date.
- Annual Reporting (Form 126): Annually, employers must file a consolidated report (Form 126) summarizing the income and tax details for each employee for the entire tax year (January 1st to December 31st). This report includes details from the monthly Form 102 submissions and serves as a reconciliation. The deadline for submitting Form 126 is typically April 30th of the following year.
- Annual Employee Summary (Form 106): Employers must provide each employee with an annual summary of their income, taxes withheld, and contributions (Form 106) by March 1st of the following year.
Failure to meet these deadlines or incorrect reporting can result in penalties, interest, and fines.
Special Tax Considerations for Foreign Workers and Companies
Employing foreign workers or operating as a foreign company in Israel introduces additional tax complexities.
- Residency Status: The tax obligations for foreign workers depend heavily on their residency status in Israel. Non-residents are generally taxed only on income sourced in Israel, while residents are taxed on their worldwide income. Determining residency involves evaluating factors like the center of life, physical presence, and intent.
- Tax Treaties: Israel has tax treaties with many countries to prevent double taxation. These treaties can affect the tax rates applicable to foreign workers and the allocation of taxing rights between Israel and the worker's home country.
- Bituah Leumi for Foreign Workers: Social security obligations for foreign workers can vary. Workers from countries with social security agreements with Israel may be exempt from Israeli Bituah Leumi contributions if they continue contributing in their home country. For workers from countries without such agreements, Bituah Leumi contributions are generally mandatory, though specific rules may apply to short-term assignments or certain visa types.
- Foreign Companies: Foreign companies employing individuals in Israel may establish a permanent establishment (PE), which triggers corporate tax obligations in Israel. Even without a PE, the act of employing staff locally creates payroll tax and social security obligations that must be managed, often requiring registration as an employer with the Israeli authorities.
Navigating these special considerations often requires expert knowledge to ensure compliance with both Israeli tax law and international tax principles.
