Employer Payroll Taxes in Israel: Income Tax Withholding, National Insurance, and Mandatory Pension

Hiring an employee in Israel involves more than agreeing on a salary. From the moment an employment relationship begins, Israeli law places a series of non-negotiable financial obligations on the employer: you must withhold income tax on behalf of the state, contribute to the National Insurance Institute on both your own account and the employee's, and participate in a mandatory pension arrangement that covers retirement savings and severance pay. These obligations apply whether you are an Israeli company, a multinational corporation with an Israeli branch, or a foreign company employing Israeli-resident workers without any local entity at all.

For foreign businesses expanding into Israel, the complexity can catch teams off guard. An Israeli employee earning NIS 20,000 per month does not simply cost you NIS 20,000 — the total employer cost is closer to NIS 24,000 to NIS 25,500 once all mandatory contributions are layered on. This guide walks you through every component, the authorities involved, the forms you must file, and the specific deadlines the Israel Tax Authority (ITA) and the National Insurance Institute enforce.

1. Overview: What Employers Owe

Three separate payroll obligations run in parallel, each going to a different authority:

• Income tax withholding (*nikui mas*): A monthly deduction from the employee's gross salary, remitted to the Israel Tax Authority (ITA). The tax is technically the employee's liability, but the employer is legally on the hook for deducting and paying it on time.
• National Insurance contributions (*dme bituach leumi*): Monthly payments to the National Insurance Institute (NII, in Hebrew: *המוסד לביטוח לאומי*). Both employer and employee have separate contribution obligations, but the employer pays both portions to the NII and recovers the employee share through payroll deduction.
• Mandatory pension and severance (*keren pensiya* / *pitzuyim*): Monthly employer and employee contributions to a recognized pension fund, managed by a licensed insurance company or pension fund. The employer also contributes a severance component, deposited directly into the pension fund or — under strict conditions — maintained internally.

All three run on the same monthly clock. File and pay by the 15th of the month following the pay period. One missed deadline triggers CPI linkage plus interest, and neither can be waived retroactively.

2. Income Tax Withholding (*Nikui Mas*)

Under Section 164 of the Income Tax Ordinance [New Version] 5721-1961 (*Pekudat Mas Hakhnasa*), every employer is required to deduct income tax from each salary payment and remit it to the ITA. The deduction follows the employee's personal marginal tax rate, determined from Form 101 (*Tofes 101*) which each employee completes at the start of employment and updates when personal circumstances change.

Progressive Tax Brackets

Israel applies six progressive income tax brackets. For 2026, the rates on annual taxable income are approximately:

• Up to NIS 84,120 (annual): 10%
• NIS 84,121 – NIS 120,720: 14%
• NIS 120,721 – NIS 193,800: 20%
• NIS 193,801 – NIS 269,280: 31%
• NIS 269,281 – NIS 558,960: 35%
• Above NIS 558,960: 47% (with a temporary 3% surtax bringing the top marginal rate to 50% for high earners)

The employer applies these brackets monthly, accounting for the employee's personal tax credits (*nekudot zikui*). Every Israeli employee is entitled to at least 2.25 credit points annually (worth approximately NIS 261 per month in tax reduction in 2026). Additional credits apply to residents, parents, new immigrants (*Olim Hadashim*), and certain other groups.

Monthly payment: Form 102

Employers remit withheld income tax monthly using Form 102 (*Doch Mas Mkur*) through the ITA's online employer portal (the *Shaam* system). Payment must reach the ITA by the 15th of the month following the pay period — July wages by 15 August, and so on. Employers above certain payroll thresholds may be required to pay twice monthly.

Annual reconciliation: Form 126

By 30 April of the following year, every employer submits Form 126 (*Tofes 126*), listing every employee, their annual salary, tax withheld, and credit points used. The ITA uses this form to audit whether your withholding was accurate. Employees receive their own copy as Form 106, which they use to file their annual income tax return or claim any refund.

3. National Insurance (NII) Contributions (*Bituach Leumi ve-Bituach Briut*)

The National Insurance Institute (*HaMossad LeBituach Leumi*) administers Israel's social security system. Contributions fund unemployment benefits, maternity pay, disability pensions, old-age pensions, work injury insurance, and the national health insurance system. Both the employer and the employee contribute separately — but the employer collects both portions and pays them to the NII together.

Contribution Rates (2026)

NII contributions apply to the employee's gross salary up to the maximum insured wage (*shkar mevisach*), updated periodically by the NII. For 2026, that ceiling is approximately NIS 47,480 per month. Salary above it attracts no NII contributions.

Two income thresholds determine the rates:

• Lower threshold (approximately NIS 7,522/month, i.e. 60% of the average wage × 10%/60%):
  • Employee NII + health: approximately 3.5%
  • Employer NII: approximately 3.45%
• Above the lower threshold and up to the ceiling (approximately NIS 47,480/month):
  • Employee NII + health: approximately 12%
  • Employer NII: approximately 7.6%

The employee's NII plus health tax is deducted from gross salary before income tax withholding, which slightly reduces the income tax base. The employer's NII share sits entirely on top of gross salary as an additional cost.

Payment: NII employer portal

Pay NII contributions monthly through the NII's employer portal (*Menahel Shkarim*). The deadline is the same as income tax — the 15th of the month following the pay period. File the online monthly report listing each employee's gross salary and contributions owed; the NII debits payment automatically from the employer's registered bank account.

Employers must register with the NII separately from the ITA registration. A foreign company that has already registered with the ITA still needs a distinct NII employer file number (*mispar menahel*) before paying its first salary.

4. Mandatory Pension and Severance Contributions

Under Amendment 5 to the Pension Fund Expansion Order (*Tzav Havra'at Kidum Mimun Pensiya*), first enacted in 2008 and fully phased in by 2017, all employees in Israel — including part-time and temporary workers — are entitled to mandatory pension coverage from their first day of employment (subject to a short waiting period).

Waiting Period

For employees who do not already have a pension fund from a previous employer, the waiting period before pension contributions begin is six months of employment. However, if an employee brings a fund from a previous job, contributions begin from the first month. The employer must contact the chosen pension provider and set up the arrangement within 90 days of the employment start date or when contributions become due, whichever comes first.

Contribution Rates

Mandatory rates are set by the Pension Fund Expansion Order:

• Employer pension contribution: 6.5% of the employee's pensionable salary (*shkar pensiyon*)
• Employer severance component (*pitzuyim*): 8.33% of the pensionable salary, deposited into the same pension fund. If the employer deposits the full 8.33%, it qualifies under Section 14 of the Severance Pay Law 5723-1963 (*Hok Pitzuyei Piterin*) for a waiver of the statutory severance liability on employment termination — meaning no further severance payment is required on dismissal.
• Employee contribution: 6% of the pensionable salary, deducted from the employee's gross salary.

Total employer cost on the pension component alone is 14.83% (6.5% + 8.33%) of pensionable salary. On a salary of NIS 20,000, that is NIS 2,966 per month in addition to the base salary.

Keren Hishtalmut (Study Fund) — Optional but Common

In addition to mandatory pension, many Israeli employment contracts include a *Keren Hishtalmut* (study/training fund). Employer contributions up to 7.5% of salary are tax-deductible for the employer and, within a NIS ceiling, tax-exempt for the employee (after a 6-year holding period). While not legally mandatory for all employees, study funds are standard in professional and managerial roles and are often expected as part of the compensation package. Failure to offer one where the industry norm provides it can make recruitment difficult and may expose the employer to claims of discriminatory conditions.

5. Foreign Employers Without an Israeli Entity

A foreign company employing Israeli tax residents does not need to incorporate an Israeli subsidiary or open a formal branch to meet its payroll obligations — but it still has to meet them. Both the ITA and the NII provide pathways for foreign employers to register and pay.

Register as a foreign employer

A foreign company can open an employer file (*tik nikuyim*) with the ITA without incorporating in Israel. It registers with the ITA's non-resident employer unit, obtains an employer identification number, and takes on the same monthly withholding and reporting obligations as any Israeli employer. The NII accepts the same arrangement. This keeps the company's Israeli legal footprint minimal while staying fully compliant.

Employer of Record (EOR)

Some foreign companies use an Israeli Employer of Record — a licensed Israeli company that formally employs the worker on the foreign company's behalf. The EOR handles ITA withholding, NII contributions, pension arrangements, and employment contracts under Israeli law, and charges the foreign company a management fee on top of the salary cost. The worker's day-to-day direction stays with the foreign client. EOR arrangements are common for companies testing the Israeli market before committing to a subsidiary.

Permanent Establishment Risk

Foreign companies should be aware that employing workers in Israel can, depending on the nature of the work, create a permanent establishment (*misgeret ka'umit*) for corporate income tax purposes — triggering Israeli corporate income tax (currently 23%) on profits attributable to the Israeli operations. Employing through an EOR does not automatically eliminate this risk if the workers have authority to conclude contracts on the company's behalf. Legal advice on the PE question should be obtained before hiring begins.

6. Penalties for Non-Compliance

Israeli employment tax law provides for both civil and criminal penalties, and the authorities enforce them actively. The ITA and NII share employer data and routinely cross-reference employee NII records against ITA withholding files to identify employers who have paid salaries but not remitted the corresponding taxes.

Late Payment: Interest and CPI Linkage

Amounts not paid by the 15th of the following month accrue interest (*rishul*) under the Interest and Linkage Law, linked to the Consumer Price Index plus a base rate set by the Finance Ministry. In a high-inflation year, that linkage alone can meaningfully inflate the debt before an audit is even triggered. The NII also applies a late-payment surcharge (*tospet pikun*) at 0.2% per day for the first 90 days, with a higher rate after that.

Criminal Liability

Under Section 219 of the Income Tax Ordinance, willful failure to deduct or remit income tax is a criminal offence carrying fines and up to two years imprisonment. Section 362 of the National Insurance Law similarly criminalises intentional non-payment of NII contributions. Directors and officers of a company can be held personally liable for employer defaults — the corporate veil does not shield them from criminal or civil enforcement in this area.

Employee Consequences of Employer Non-Compliance

When an employer fails to remit withheld tax, the employee may still be pursued by the ITA for unpaid income tax — even though the amounts were deducted from their salary. The employee's only protection is to demonstrate that the deduction actually occurred (using pay slips). This means that failing employees are doubly harmed: their net salary was reduced for tax that was never paid, and they face ITA collection action. Israeli courts have held that employers who deduct but fail to remit are liable both to the ITA and to the employee for resulting damages.