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Setting up payroll in Israel

Setting up a payroll in Israel

Setting up a payroll system in any country requires a thorough understanding of the local laws, regulations, and reporting requirements. In Israel, this process is no exception. So, here is an outline the essential steps and key considerations for setting up a payroll in Israel, covering aspects such as registration, ongoing reporting requirements, employer costs, employee rights, and the importance of using a corporate entity.

How to setup a payroll in Israel

To setup a payroll in Israel, you’ll need to register as an employer with the Israeli Tax Authority. Employers are required to register within 30 days of hiring their first employee. This involves submitting an employer registration form, along with relevant documents such as the company’s articles of association, a business license, and the director’s identity card or passport.

Reporting your payroll:

  1. Employers are required to submit real time monthly reports and to issue employees with a payslip each month. The reports must detail the employee salaries, deductions, and tax withholdings.
  2. Yearly Reporting: At the end of each calendar year, employers must submit an annual report to the ITA, summarizing all payroll-related information for the year. Also, each employee should receive a Form 106 which summarizes their annual salary information.

What is gross salary vs. net salary?

The gross salary is the amount earned by the employee before deductions and taxation. The employer is responsible to settle the employees’ taxes, social security, pension, and any other relevant deductions from the gross salary. Typically, the ‘gross salary’ is the discussed wage when accepting new employees.

The net salary is the balance paid to the employee after all the taxes and deductions have been subtracted from the gross salary. So, the net salary will be less than the gross salary.

Employer costs

In addition to the gross salary, the employer will have additional employee related costs:

  • Severance pay contributions
  • Employer pension contributions
  • Employers Social Security
  • Vacation bonus
  • Vacation pay
  • Sick pay
  • Keren Hishtalmut (optional)

Employer costs

Employee Rights:

  1. Transport: Employers must provide an allowance for transportation which will be added to the gross salary.
  2. Paid vacation days.
  3. Sick Leave:

Employees entitlement to sick leave and vacation varies based on the duration of their employment. The number of days an employee can take increases progressively with each year of employment.

Who Can Register as an Employer in Israel?

Registering as an employer in Israel can be done by any legal person or entity conducting business activities. So, whether you’re an Osek Murshe, or a Limited company, you can setup a payroll. However, if you’re ready to take on employees, it is strongly recommended to establish a corporate entity to separate personal and business liabilities. Not using a corporate entity can expose individual employers to personal financial risks in case of legal disputes or financial obligations.

Can a non-Israeli company register as an employer in Israel?

Non-resident companies can register and setup a payroll in Israel. The company would first be required to register with Registrar of companies as a ‘foreign entity’ and obtain an Israeli corporate ID number.

Registration of a foreign entity in Israel is usually done when a company meets the ‘permanent establishment’ criteria

Conclusion

Establishing a payroll in Israel requires compliance with specific registration procedures and ongoing reporting requirements. Employers must familiarize themselves with the local labour laws, ensure proper employer contributions, and fulfil employee rights. Additionally, utilizing a corporate entity is advisable to mitigate personal financial risks associated with operating as an employer. By following these guidelines, employers can set up a payroll system in Israel that adheres to the country’s regulations and safeguards both employer and employee interests.

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