Israel's tax system is characterized by a combination of national insurance contributions, income tax, and other levies. Both employers and employees have specific obligations to fulfill to ensure compliance with Israeli tax laws. Understanding these obligations is crucial for businesses operating in Israel, especially when managing payroll and employment taxes.
Navigating the complexities of Israeli tax regulations can be challenging. This guide provides a detailed overview of employer tax obligations and employee tax deductions in Israel, covering social security contributions, income tax withholding, available deductions, compliance deadlines, and special considerations for foreign workers and companies.
Employer Social Security and Payroll Tax Obligations
Employers in Israel are required to make social security contributions on behalf of their employees, which are managed by the National Insurance Institute (Bituah Leumi). These contributions fund various social programs, including healthcare, unemployment benefits, and pensions. Additionally, employers must pay payroll tax, known as "parallel tax," which is allocated to employee training and development.
- National Insurance Contributions: Employers contribute a percentage of their employees' gross salary to the National Insurance Institute. The exact rate varies depending on the employee's age and residency status.
- Parallel Tax: Employers are also required to pay a parallel tax, calculated as a percentage of the employee's gross salary.
- Tax Rates and Thresholds (Approximate for 2025):
| Contribution Type | Rate (Employer) |
|---|---|
| National Insurance | 7.60% |
| Parallel Tax | 0.5% |
Note: These rates are subject to change and should be verified with the National Insurance Institute or a qualified tax professional.
Income Tax Withholding Requirements
Employers in Israel are responsible for withholding income tax from their employees' salaries and remitting it to the tax authorities. The amount of income tax to be withheld depends on the employee's income level, tax bracket, and any applicable tax credits or deductions.
- Tax Brackets: Israel uses a progressive income tax system, where higher income levels are taxed at higher rates.
- Withholding Calculation: Employers must calculate the amount of income tax to withhold from each employee's salary based on the current tax brackets and the employee's individual circumstances.
- Tax Brackets (Approximate for 2025):
| Income Range (NIS per month) | Tax Rate |
|---|---|
| 0 - 7,080 | 10% |
| 7,081 - 12,080 | 14% |
| 12,081 - 19,020 | 20% |
| 19,021 - 26,530 | 31% |
| 26,531 - 55,230 | 35% |
| 55,231 and above | 47% |
Note: These tax brackets are subject to change and should be verified with the Israeli Tax Authority or a qualified tax professional.
Employee Tax Deductions and Allowances
Employees in Israel are entitled to certain tax deductions and allowances that can reduce their taxable income. These deductions can include contributions to pension funds, life insurance premiums, and donations to recognized charities.
- Pension Contributions: Contributions to approved pension funds are tax-deductible, subject to certain limits.
- Life Insurance Premiums: A portion of life insurance premiums may be deductible.
- Donations: Donations to recognized charities are tax-deductible, up to a certain percentage of the employee's income.
- Tax Credits: Employees may also be eligible for various tax credits, such as credits for children, education, or disability.
Tax Compliance and Reporting Deadlines
Employers in Israel must comply with specific tax reporting deadlines and requirements. This includes filing monthly payroll reports and annual tax returns.
- Monthly Payroll Reports: Employers must file monthly payroll reports (Form 102) with the tax authorities, detailing the salaries paid to employees and the taxes withheld.
- Annual Tax Returns: Employers must also file an annual tax return (Form 126) summarizing the total payroll and taxes paid during the year.
- Reporting Deadlines: The deadlines for filing payroll reports and tax returns vary depending on the size of the company and the method of filing (electronic or paper).
- Monthly payroll reports are generally due within 15 days of the end of the month.
- Annual tax returns are typically due by the end of April of the following year.
Special Tax Considerations for Foreign Workers and Companies
Foreign workers and companies operating in Israel may be subject to special tax rules and considerations. These can include residency rules, tax treaties, and exemptions for certain types of income.
- Residency Rules: The tax residency of a foreign worker or company is determined based on factors such as the length of stay in Israel and the location of business activities.
- Tax Treaties: Israel has tax treaties with many countries, which can provide relief from double taxation.
- Exemptions: Certain types of income, such as income from foreign investments, may be exempt from Israeli tax under certain conditions.
- Foreign Experts: Foreign experts temporarily assigned to Israel may be eligible for certain tax benefits or exemptions. It is important to consult with a tax advisor to determine the specific tax implications for foreign workers and companies in Israel.
