Employee benefits: legal duties and taxation

Service page: Payslip review by a lawyer and CPA.

Mandatory benefits versus voluntary benefits: the distinction employers miss

Israel has a long list of labor laws that require employers to give employees minimum benefits, and these are not “generosity” but a mandatory duty that cannot be waived. Beyond the legal duties, many employers choose to add voluntary benefits to attract and keep employees. The distinction between the two is critical, both for tax purposes and for enforcement.

Which benefits must an employer give by law, with no waiver by agreement?

These are the benefits that every employer must give, regardless of what the contract says:

• Pension: under the Extension Order for Comprehensive Pension Insurance in the Economy (from 2008, in a consolidated version from 2011), an employee aged 21 (a man) or 20 (a woman) or over is entitled to pension contributions: from the first day of work if they already have active pension insurance, and otherwise after 6 months of work. Since the January 2017 wages, the minimum contributions are 6% of the wage at the employee’s expense and 12.5% at the employer’s expense (6.5% benefits contributions and 6% severance).
• Annual leave days: under the Annual Leave Law, 5711-1951, an employee is entitled to a minimum number of annual leave days that grows with seniority (16 days for each of the first five years, and from the sixth year more, gradually; section 3).
• Sick days: under the Sick Pay Law, 5736-1976, an employee accrues one and a half days for each full month of work, up to 90 days (section 4); for the first day of illness they are not entitled to payment, for the second and third days to half of the sick pay, and from the fourth day to full sick pay (section 2).
• Recuperation pay: under the extension order on recuperation pay, an employee who has completed one year of employment is entitled to recuperation days according to seniority (in the private sector: 5 days in the first year, 6 in years 2–3, 7 in years 4–10, 8 in years 11–15, 9 in years 16–19 and 10 from the 20th year). The rate for a recuperation day in the private sector for the 2026 recuperation year is NIS 451.5, and in the public sector NIS 511.6 (Kol Zchut, as of 9 October 2026).
• Severance pay: under the Severance Pay Law, 5723-1963, an employee who was dismissed after working at least one year for the same employer (and in some cases an employee who resigned) is entitled to compensation of one month’s wage for each year of employment (sections 1 and 12).

The Wage Protection Law, 5718-1958 adds another layer: it requires wages to be paid on time, defines what counts as “wages” for the purposes of the Law, and gives the employee strong protection against unlawful deductions.

Benefits and tax: the point that can cost a lot

This is where employers (and sometimes their accountants too) tend to slip up. Under the Income Tax Ordinance [New Version], income from employment includes not only the wage but also the value of a benefit the employee received. This means:

• A company car: the “value of use of a vehicle” is a percentage of the car’s adjusted consumer price, under regulation 2 of the Income Tax Regulations (Value of Use of a Vehicle), 5747-1987 (תקנות מס הכנסה (שווי השימוש ברכב), התשמ״ז-1987), and it is added to the taxable wage, even if the employee “does not feel” that they received a wage.
• Group health insurance: the employer’s payment is a benefit given to the employee by their employer, so as a rule it is included in their income from employment (section 2(2)(a) of the Income Tax Ordinance).
• Discounts on the company’s products: a discount for an employee is a benefit that may be considered income from employment; the treatment depends on the circumstances and should be checked with an accountant.
• Subsidized meals: the tax treatment depends on the structure; check it with an accountant.

The value of benefits is part of income from employment, so every Form 106 given to an employee must faithfully reflect the full income, including the value of benefits.

How does an employer report the value of benefits on the payslip and on Form 106?

An employer must report the value of every benefit on the payslip and on the annual Form 106. Faulty documentation, even if a benefit was given in good faith, can be read as an unlawful deduction from wages on the one hand, and as failure to report income on the other. Both are bad situations. This is what a payslip review by a lawyer and CPA looks like.

The right approach: before offering any benefit, get an accountant’s opinion on how it is treated for tax, and build the conclusions into the payroll procedures.

Benefits worth considering, with an eye on tax

Some employers go further and offer more than the legal duty: a study fund (keren hishtalmut), which comes with a significant tax advantage for both sides, managers’ insurance, a pension above the minimum, flexible hours, or bonuses. Each of these benefits has its own tax track, which must be reflected in the wage.

An employer who understands employee benefits does not only offer more: they manage correctly, avoid tax audits, and recruit better.

Frequently asked questions

Do pension contributions also cover severance pay?

Only in part. A contribution of 6% to the severance component replaces only 72% of the severance pay, and even that only within a Section 14 arrangement under the Severance Pay Law and the general approval given under it. Without proper arrangements, the liability for severance pay stays open.

How many sick days do you accrue, and from when are they paid?

An employee accrues one and a half days for each full month of work, up to 90 days (section 4 of the Sick Pay Law). For the first day of illness they are not entitled to payment, for the second and third days to half of the sick pay, and from the fourth day to full sick pay (section 2).

From when are you entitled to recuperation pay, and how many days?

Under the extension order on recuperation pay, an employee who has completed one year of employment is entitled to recuperation days according to seniority: in the private sector, 5 days in the first year, 6 in years 2–3, 7 in years 4–10, 8 in years 11–15, 9 in years 16–19 and 10 from the 20th year.