Taxation of employment income - part 1 - Tax at source

Over the next few posts, we will cover many aspects pertaining to employment income - relating to the obligations of both employer and employee, with specific focus on employee rights and taxation.

As discussed previously, a person whose only income is their salary is not required to file a tax return. This is because Israel operates a Pay-As-You-Earn system which obligates the employer to deduct at least the correct amount of tax from the salary of an employee.

As a basic rule, each month's tax is based on the the monthly salary and the various credits that the employee is entitled to for that month. Potentially, that means overpaying in a month in which you got significant overtime pay, bonus etc. The law therefore allows the calculation to be made on a cumulative basis throughout the year if you have worked in the same place since January, or this is your first employment of the year.

In order to ensure that you get the correct amount of credit points, form 101 must be filled in (link to the form); immediately for a new employment and on 1st January each year for ongoing employment. On a practical level, it should be filled out in time for your employer to process your first salary of the year.

The form is split into two pages. The second page is for claiming all of the relevant credits. Most do not require any paperwork or confirmation from the tax office, but read the notes carefully!

The first page contains some basic information about both employer and employee. 

Of particular importance is section ה which gives details about the employment. Specifically, if you have more than one place of employment (and for these purposes, a pension is considered another employment), you will, most likely need to get a "Teum Mas" - the subject of the next post.

It should be noted that only credits enumerated on the 101 and those directly related to payroll ( e.g. Pension, life insurance etc. if applicable) can be given by the employer. Anything else will need to be claimed via a tax return (the prime example is donations - see here for more).

Employers are also required to deduct Bituach Leumi at source. The lower rates of Bituach Leumi will be given in the main employment; all other employments will have the full rate deducted unless a "Teum Bituach Leumi" is done - but that's for another time.