Entrepreneurs and businesspersons interested in operating businesses in the State of Israel must be aware of the obligations imposed on them as self-employed dealers and employers, and cope with a variety of obligations to the state authorities.
These obligations include compliance with shield laws protecting employees in the workplace, compliance with tax laws, and reporting obligations to the tax authorities, and also involve close interfaces with the National Insurance Institute.
Unique Interface with the National Insurance Institute
Employers and self-employed individuals interact uniquely with the National Insurance Institute (NII), distinct from their engagements with tax authorities. This uniqueness derives from the fact that the self-employed and employers must report to the NII immediately upon the start of business or the hiring of an employee. They must also pay national insurance contributions in conformity with the provisions of the law, a portion of which constitute health tax and a portion of which constitutes national insurance contributions.
Unlike the straightforward interface with the Israel Tax Authority, payments of national insurance contributions lay out the scope of entitlement to significant rights for self-employed dealers and employees in the form of benefits payable to them during various events in their lives, some of which are in lieu of wages (such as maternity benefits, unemployment benefits, income supplements in the event a self-employed dealer or employer goes bankrupt, etc.). The sums of the benefits derive from the reported wage sums in respect whereof insurance contributions were paid.
Furthermore, the reporting and payment dates to the NII activate qualification periods for entitlement to benefits. For example, employees must fulfill a qualification period of six months of employment during the 18 months preceding employment severance to be eligible for unemployment benefits.
Moreover, a substantial component of the national insurance contributions is a medical insurance premium, which is compulsory pursuant to the National Health Tax Law. The payment of this tax guarantees the self-employed dealer or employee has medical insurance coverage, which encompasses a spectrum of professional and specialized medical treatments.
Defining Your Occupational Status
In order to ascertain the rate of the payments and to substantiate entitlements vis-à-vis the NII, entrepreneurs must decide how they want to engage in their occupations. Do they intend to be a self-employed supplier of a product or a service provider, and to register as an independent dealer without employing employees? Are they to be a salaried employee of another employer? Do they intend to open a large business and hire employees?
The defined occupational status imposes various obligations on insureds. The self-employed have personal obligations to the NII, both in terms of the reporting obligation and the payment obligation. Employers must report for their employees and must also pay insurance contributions, a portion of which is deducted from the employees’ wages and transferred to the NII, while another portion is paid by the employers. Salaried employees rely on their employers’ obligations and do not have to report and pay directly.
Employers’ reports and payments of national insurance contributions offer insurance coverage against NII claims. This coverage applies if employees experience work-related accidents, occupational diseases, and become eligible for national insurance benefits. Employers do not face exposure to any risk of an NII subrogation claim because they themselves are the insured entities. However, if an employer fails to pay the insurance contributions or fails to report about its employees, such employer may face exposure to an NII subrogation claim.
Residency and Foreign Employees
The NII imposes the payment obligation and grants entitlement benefits solely to residents of Israel. A person’s residency connection to the State of Israel is what provides the insurance coverage. The problem is that the law does not have a straightforward definition of “resident.” The law stipulates who is not deemed a resident and, in principle, anyone residing illegally in Israel is not entitled to national insurance.
Notwithstanding that stated, the NII has special coverage for people who are not residents but are legally residing temporarily in Israel and have work visas. A work visa is specific to a particular employer and, in such instance, the employer must report that it is employing a foreign employee and must pay insurance contributions for that employee.
The rate of the insurance contributions for foreign employees is lower, since the insurance includes only some national insurance lines, mainly benefits in lieu of wages, such as maternity benefits, unemployment benefits, benefits for occupational accidents or occupational illnesses, and employer bankruptcy.
Exemption from Paying Insurance Contributions
Even though employers deduct a portion of the insurance contributions from the employee’s wage and transfer it to the NII, while paying the remaining portion, the payment and account-settling obligations to the NII rest on employers.
Therefore, it is important for employers to ascertain if they have employees who are entitled to an exemption from paying insurance contributions. If an employee is entitled to an exemption, the employer does not have to pay the insurance contributions in respect of that employee. If the employer did indeed pay, he may demand a refund of the insurance contributions paid in respect of the employee for the period of the exemption.
Who Is Entitled to an Exemption?
Anyone receiving a general disability pension from the NII or anyone receiving a disability benefit due to an occupational injury is entitled to an exemption. To clarify, if an employee is receiving disability benefits for illness or work-related injuries, the employer is not required to make insurance contributions. Employers should ask their employees if they have grounds for an exemption and, if they do, employers are not obligated to pay national insurance contributions (which are a substantial component of the employment cost).
If an employee who is a resident of Israel is employed in another country concurrently with his employment in Israel, the employer must pay the full national insurance contributions in respect of his wages in Israel. Sometimes this creates a double payment obligation, both in the additional country where an employee earns a wage and in the State of Israel, except in the instance of a treaty country. If Israel has a social security treaty with the other country where the employee is employed, the employer is usually exempt from paying double insurance contributions. However, the exemption from double payment does not apply to the Israeli health tax. In any case, employers must check the wording of the treaty with such other country.
Additional exemptions are granted to low-wage earners, to new immigrants for the first six months, to early pension recipients above the age of 62, and to employees injured at work and who receive injury pay (for the first three months after the injury).
Wage and Wage-Related Payments Due to Employment Severance
All of an employer’s wage and wage-related payments to an employee constitute the basis for calculating and paying the contribution amounts the employer must transfer to the NII (the employee’s part and the employer’s part).
Which Fringe Benefits Are Not Subject to the Payment of Insurance Contributions?
Employers sometimes grant employees benefits in kind that are not recorded in the pay slips, such as meals, entertainment, reimbursements of various expenses, etc. It is extremely important that employers also pay the insurance contributions in respect of all taxable benefits. If not, they may be charged to pay those contributions as well as fines, if the NII conducts an audit of deductions.
Certain fringe benefits are exempt from insurance contribution payments. These include reimbursements for workplace refreshments, uniform or work clothes purchases, social benefits up to the legal maximum, and employee equity track options. Payments related to employment severance, whether made before or as a result of it, are also exempt. These include severance pay, sick day redemption, acclimation pay, and non-compete compensation.
The exemption does not apply to payments of convalescence pay, payment in lieu of advance notice, or any payment whose defined purpose is inconsistent with its sum.
The reason for this is that any payment paid during the employment period prior to the severance of the employment relations is liable for the payment of insurance contributions, while any payment in respect of the period subsequent to the severance of the employment relations is exempt.
Employers’ Obligations to the NII
Firstly, when hiring an employee, employers are obligated to report to the NII. In the case of self-employed individuals, they should commence reporting to the NII when initiating their self-employment. Reporting to the NII is of paramount importance to obtain insurance coverage and begin accumulating the requisite qualification periods, which are preconditions to eligibility for particular benefits.
Employers must report new employee hires within thirty days. This means that even if the employer was late in reporting and an insurance event transpires within the first thirty days of employment, the coverage will not be diminished. After the initial report, employers must regularly report the number of their employees and their wages. Reporting holds significant importance as it determines entitlement levels for wage-replacement benefits. These benefit amounts are linked to the employee’s or self-employed dealer’s earnings.
Secondly, employers must transfer the employers’ insurance contributions and their employees’ contributions deducted from their wages to the NII.
The insurance contribution rate is calculated as a percentage of the total payable wage, which includes benefits (excluding exemptions). For self-employed individuals, it’s a percentage of their income. The NII conducts periodic audits of deductions. If discrepancies are found where all wage components weren’t considered, the NII may issue an insurance assessment and impose fines for incorrect payments by the employer or self-employed individual. Sometimes the NII initiates an audit of deductions subsequent to an audit conducted by the Israel Tax Authority. However, the NII is not bound by any settlement agreements reached between an employer and the Israel Tax Authority.
Any employer that fails to report on time or fails to pay the national insurance contributions in respect of its employees exposes itself to a claim by the National Insurance Institute.