Israel Payroll: Rules, Regulations, and Compliance Guide

Israel is situated in Western Asia to the south of the Mediterranean Sea. The country is known for its robust economy with flourishing sectors, including automotive, aerospace, and cyber security. Also, as it is centrally located and is surrounded by several Arab countries, it holds strategic importance to the Global economy. 

The country has a free-market economy. It has a GDP of $527.18 billion, which is currently growing at a rate of 6.1%. The country’s employment rate stands at 61.6% and boasts one of the highest youth populations in the world. The nation has opened its economy for foreign investments; hence, several international companies are setting up their businesses in Israel. 

Israel is ranked 35th out of 190 nations in the Ease of Doing Business Index. Hence, setting up a new business in Israel is relatively easy. Also, as the country has a high youth population, people actively seek jobs. If you plan to set up a company, you will have access to a workforce and resources.

Whenever a new company is established in Israel, it must ensure that the payroll is set up and processed at fixed intervals. You must have a comprehensive payroll policy that addresses the needs of the employees working in the company and adheres to the Federal Law of Israel. 

Read on to understand how to implement a compliant and employee-friendly payroll in Israel.

How Is Payroll Calculated in Israel?

The payroll is calculated using software or an internally-developed tool. However, there are a few companies that process payroll manually. It depends on the company’s size and the budget allocated to payroll processing. 

Before factoring in different payroll contributions, you must develop a robust payroll in Israel. The payroll system calculates vital contributions like gross salary, net salary, allowances, etc. The methods of calculating these components and their maximum threshold should be mentioned in the company policy. 

The company establishes a standard calculation system for all components. Hence, there is no scope for discriminating between two employees during the payroll processing. You must also check for different federal laws related to payroll processing to establish a compliant system.

Important Elements of Salary Structure in Israel

The salary structure in Israel consists of different components, which include

Cost to Company (CTC)

The cost to the company (CTC) is the aggregate of all the components that are a part of the payroll. It defines the total amount that the company bears when it recruits a resource. The CTC includes gross pay, net pay, allowance, bonus, etc. It is stated in the employee’s employment contract.

Gross salary

The annual earning potential of the employee is the gross pay. It is the sum of the employee’s earnings and tax deductions. 

Net salary

The net salary is the amount credited to the employee’s account. The net pay is calculated by factoring in all the deductions like social security, taxes, etc., and removing them from the gross income.

Basic salary

The basic salary is the primary component of the payroll system. Based on the basic salary, other salary elements are calculated. The basic pay comprises around 35-40% of the employee’s total pay. It is ascertained based on the employee’s role and the prevailing industry standards for a similar position.

Allowances

The company also bears the cost of the employees’ expenses in delivering work. The employees in Israel get different types of allowances from their employers. Some standard allowances that all employees enjoy are:

• Food allowance
• Travel allowance
• Internet allowance

Bonus

A bonus or a 13th-month salary is not a mandatory requirement in Israel. However, the employees get a recreation payment once they complete a year of service. The amount is decided by the Government and the number of years the employee has been with the company.

How to Set Up a Payroll in Israel?

To set up a payroll in Israel, you can follow the steps listed below:

Step 1: First, you must establish your business in Israel. Choose the type of company, company name, etc. and collect or curate all the necessary documents you might need during the incorporation process.

Step 2: Now, document the company’s Articles of Association and the bylaws. You must submit these documents to the registrar to ensure that you get the EIN and the certificate of incorporation.

Step 3: Register your company with the local and central tax and social security authorities to make regular tax payments and contributions.

Step 4: Reach out to a bank in Israel and set up an account that will be used for all business transactions.

Step 5: Review the timesheets of different employees to ascertain the gross pay. The gross pay includes the overtime payments calculated based on the additional work hours from the timesheet.

Step 6: Calculate the tax amount and the social security contributions based on the employee’s income slab to arrive at the net pay.

Step 7: Choose a payroll system and process the payroll for all employees.

Step 8: Select a payroll cycle for your employees based on Israeli law and the company’s preference on how frequently it wants to make payments.

While setting up a payroll system, you should stick to all the payroll rules and regulations in Israel. Contact a PEO service provider like Multiplier for all payroll requirements if you feel overwhelmed by the process. 

A Step-by-step Process of Payroll Processing in Israel

Setting up payroll in Israel involves various steps, including finalizing the payroll system and transferring salaries to employees. You take a step-by-step approach to navigate the entire process easily.

• Select a system: There are different payroll systems in Israel. You must decide on the budget and consider the size of your organization before you pick a payroll in Israel. Some typical payroll systems in Israel are:

1. 1. Manual payroll: The manual payroll system is quite common in Israel, as several companies opt for it. If you process your payroll manually, you will have to hire a dedicated team to run the payroll in Israel. Larger companies that can afford to have a payroll team choose this route.
   2. Payroll outsourcing: You can contact a vendor to manage the company’s payroll system. However, you must keep a tab on the entire process and if the third party is adhering to all the labor laws.
   3. Payroll software: Payroll software automates the entire payroll process in Israel, and you need to feed in some relevant information, and it will process the payroll automatically every month. 

• Create a payroll policy

1. 1. Your company needs to have a guiding policy, as there are several federal laws related to payroll in Israel. You must create a policy and include all the details about the company’s payroll process so that the employees can refer to it in case of ambiguity.
   2. The policy will enlist the rules that govern every facet of the company’s payroll, like the upper limit on allowances, calculation of overtime, etc. 

• Add the employees

1. 1. Once you decide on a payroll system, you should add all the employees to that system.
   2. You must have access to basic details of the employees like their names, employee IDs, date of birth, etc. Add these details to the payroll system.
   3. You must also add the salary structure and other crucial details like the methodology of amount calculation, etc., to the payroll system.
   4. Now, add the frequency of payments to ensure that all the salary components are paid to the employees as per the payroll cycle. 

• Check the timesheets

1. 1. After establishing the system, you must check the employees’ timesheets to calculate the overtime. You need the overtime amount to calculate the employees’ gross pay.
   2. Now, examine mandatory deductions and deduct them from the gross pay to calculate the net payable salaries of the employees.

• Reconciliation

1. 1. Reconciliation is an essential step in payroll processing. Hence, you must cross-check all the inputs to ensure the payroll is processed correctly. 
   2. Check the ledger and match it with the payments to ensure no room for errors. If there are any errors, you should investigate them immediately.

• Pay slip distribution

1. 1. You must create pay slips for all the employees who receive a payment in the payroll cycle. 
   2. You can give your employees a hard copy of the pay slips or mail them a digital copy. The number of pay slips you get will depend on the payroll cycle.
   3. All employees must have an active bank account to ensure they receive their salary payments. You can assist the employees in opening a bank account at any local bank in Israel. 

Payroll Contributions

Payroll contributions are the bedrock of the payroll process in Israel. You must know about these contributions and try to stick to the minimum requirements decided by the Israeli Government while calculating the value of these components.

Minimum wage

• All companies in Israel must pay their employees a salary equivalent to at least the minimum wage decided by the Government.
• The minimum wage in Israel is set at ILS 5,400 per month for all employees, irrespective of their industry.
• The minimum wage for employees receiving an hourly payment is ILS 29.

Overtime

• All employees who work beyond their regular hours are entitled to overtime pay.

• Employees who work for two extra hours get a payment equivalent to 125% of their regular salary.
• If an employee works beyond two additional hours, the overtime payment is calculated at the rate of 150% of the regular pay.

Employer contribution

Employers in Israel contribute to different social security accounts of their employees. These contributions are made directly to the bodies that manage these accounts.

Hence, the employer makes around 20.8% to 24.33% of payroll contributions for their employees. 

Employee contribution

Employees contribute a percentage of their salary towards social security. This amount gets deducted from the employee’s gross pay and credited to the bodies that manage the social security accounts. 

Hence, the employees contribute around 9.5% to 16.78% towards payroll based on their income.

Taxes

All employees must pay an income tax on the money they earn in Israel. The employer must deduct the tax amount from the employee’s salary and pay it regularly to the tax authorities. 

Israel follows a progressive taxation system where the tax rate increases with income. 

Bonus

There are no legal requirements for bonus payments in Israel. However, employees are entitled to a recreation payment after completing a year with the organization. The bonus is credited to the employees anytime between July to September. The employees receive ILS 1,890 as recreation pay once they complete a year. Post that, the amount is decided based on the number of years of employment.

Payroll Cycle

Companies in Israel follow a fixed payroll cycle wherein they follow a monthly payroll cycle. However, if a company chooses to make weekly or fortnightly payments, it will be stated in the employment contract and the company’s payroll policy.

Israel Payroll Options for Companies

Before you decide on a payroll option, consider the different options available in Israel. Decide on a budget and figure out the company’s requirements before choosing your company’s payroll option.

• Internal payroll: Internal payroll is used in Israel by most large companies with human resources departments to manage payroll processes. The company administers the entire system internally by adding more workers to speed up the procedure.
• Remote payroll: A remote payroll is a typical choice for branches and subsidiaries. In this case, the parent company’s payroll system contains a list of the subsidiary employees and pays them per Israeli legislation.
• Payroll processing company: You may handle your payroll in Israel with payroll processing businesses. However, you will be responsible for overseeing all payroll-related legal issues.
• Global PEO: Any organization’s payroll process can be managed by a PEO firm. Contact a global PEO platform like Multiplier to relieve yourself of the responsibility of overseeing your company’s payroll system.

Entitlement and Termination Terms

The employment contract should specify the employee’s rights and include termination clauses to prevent any issues with termination.

The rights of employees cover compensation, working conditions, leave, and other benefits. The employer must give a legitimate basis for firing an employee. An employee may be fired for the reasons listed below:

• After a conversation between the employer and the employee, an agreement was reached
• The employee engaged in dishonest behavior while working there.
• If the company undergoes a significant transformation

In Israel, the termination of an employee involves a hearing where the employer invites the employee to a hearing process. The invitation enlists the details of the termination. The company gives enough time to the employee to prepare for the process. During the hearing, the employee’s manager listens to the employee’s side and considers their arguments.

The decision of the manager is then communicated to the employee in writing. If the manager agrees with the termination decision, a termination letter must be shared with the employee within 48 hours. 

If the employee is terminated, they are entitled to severance pay. The severance pay is calculated by considering one month’s salary and multiplying it by the years the employee worked with the company.

Israel Payroll Processing Company

If you are new to Israel and unsure of the laws and norms that apply to businesses in the country, you can ask for assistance from professionals who can walk you through the procedure.

For information on the local legislation and other standards that control the payroll systems in Israel, contact a PEO business like Multiplier. If you want the best payroll aid support, keep your options open.

How Multiplier Can Help with Global Payroll 

Setting up a payroll system in Israel requires compliance with Israeli laws. You can swiftly set up a compliant payroll system with the appropriate direction and professional assistance.

You can contact a worldwide PEO platform like Multiplier to establish your payroll needs. Multiplier has helped businesses build compliant payroll systems in more than 150 nations. Our knowledgeable staff will help you learn about the federal requirements relevant to Israel and will work with you to establish a payroll system that complies with those rules and accommodates the demands of all employees.