Companies typically use an Employer of Record for fast entry, payroll management once an Israeli entity exists, and entity setup for firms building a durable technology or R&D presence. Israel's mandatory pension fund (keren pensia) and its severance pay (pitzuim) system are the two features requiring the most careful planning.

Employer of Record in Israel

An EOR allows a company to hire in Israel without registering with the National Insurance Institute (Bituach Leumi) or managing the mandatory pension fund and severance fund contributions. It suits companies making early technology or R&D hires, testing the Israeli market, or hiring before a longer-term entity decision. It is less suited to companies with an existing Israeli entity or planning larger, long-term teams where direct pension and severance fund management is expected.

How payroll works in Israel

Israeli payroll withholds income tax at progressive rates and requires both employer and employee contributions to the National Insurance Institute (Bituach Leumi), covering pensions, disability, and related benefits. Employers must also contribute to a mandatory pension fund (keren pensia) for each employee, and must either contribute to a severance fund (pitzuim) or maintain a severance liability. Payroll is monthly, and the combination of pension fund and severance obligations makes Israeli employer on-cost planning more complex than the headline social security rate alone suggests.

Payroll frequency and reporting obligations

Monthly payroll is standard, with income tax withholding and Bituach Leumi contributions remitted monthly. Pension fund contributions must be remitted monthly to the employee's chosen pension fund. Annual tax reporting includes issuing employees with a Form 106 (income and tax summary) for their own annual filing. Employers must register with the Israel Tax Authority and Bituach Leumi before the first employee starts work, and pension fund registration must be completed within a set window of the employment start date.

Key payroll nuances

The mandatory pension fund contribution is a significant employer on-cost: employers must contribute a minimum percentage of salary to the employee's chosen pension fund, and employees also contribute. The severance pay (pitzuim) system is a distinctive feature: employees are entitled to severance equivalent to one month's salary per year of service on termination (including resignation in some circumstances), and employers can either fund this through a dedicated severance fund or maintain an internal accrual. Many employers use a combined pension and severance fund arrangement that satisfies both obligations simultaneously. The Jewish calendar affects the working week (Friday afternoon and Saturday are the Shabbat rest period) and public holiday planning.

Pay components and employer costs

Typical pay components include base salary and, in the technology sector, equity compensation (options or RSUs) which is common and affects tax planning. Employer Bituach Leumi, pension fund, and severance fund contributions together commonly add 15 to 20 percent or more on top of gross salary, depending on the specific pension and severance fund arrangement chosen. Technology sector compensation packages are typically competitive by global standards, reflecting the depth of demand for skilled talent.

Benefits and leave entitlements

Statutory annual leave starts at 12 days per year, rising with tenure, though many employers offer more as a competitive standard. Sick leave accrues at 1.5 days per month worked, with pay percentage increasing with the duration of absence. Maternity leave is a statutory 26-week entitlement, with a portion funded through Bituach Leumi. Paternity leave is a separate statutory entitlement. Public holidays follow the Jewish calendar, including Rosh Hashanah, Yom Kippur, Sukkot, Passover, and other observances, which shift dates annually and affect business planning.

Hiring and employment contracts

Written employment contracts are standard practice and required for certain terms to be enforceable. Probation periods are commonly three to six months, contract-defined. Fixed-term contracts are permitted but must genuinely reflect temporary or project-based work. Termination without just cause requires notice (generally one month for most employees) and triggers the severance pay entitlement for employees with at least one year of service. The severance entitlement applies even on resignation in certain circumstances, making Israeli termination planning more nuanced than a simple notice-period formula.

Entity setup in Israel

A private limited company (Chevra Baam, Ltd) registered with the Israel Companies Registrar is the standard vehicle for foreign employers. There is no fixed minimum capital requirement in most cases. Post-incorporation, the entity registers with the Israel Tax Authority, Bituach Leumi, and the relevant pension fund administrators before hiring. End-to-end setup typically takes four to eight weeks, with bank account opening sometimes the pacing item for foreign-owned entities.

EOR vs Payroll Management vs Entity Setup — Israel

Frequently asked questions