Employee Termination — What You Need to Know About Accounting and Tax Implications

What is Employee Termination and Who Needs to Know About It?

Employee termination is an agreement or notice by an employer to end the employment relationship with an employee. In Israel, when an employer terminates the employment relationship, they are required to pay severance pay under certain circumstances — and this is not something that can simply be ignored.

Who needs to deal with this? Owners of licensed businesses and companies with employees, human resources managers, startup founders in the establishment phase, and nonprofits managing teams. Employees who have received a termination notice should also understand their rights — to ensure the calculation is correct and no payments have been overlooked.

Ben Or Kook assists colleagues and companies in planning terminations in advance, calculating severance correctly, and reporting to the tax authorities without errors. This is part of our payroll management service — every departing employee must be handled with precision to ensure the company does not remain with a debt or fine as a result of an error.

How Much Severance Pay Must Be Paid? How Is It Calculated?

This is a question that comes up frequently. The answer depends on several factors: how many years the employee worked, the reason for termination, and what the monthly salary was.

Generally, if an employee is terminated under Section 14 of the Collective Labor Agreements Law (known as "termination without cause" or termination by the employer not due to disciplinary reasons), they are entitled to severance compensation at a rate of one month's salary for each year of employment. If the employee worked less than one year, they are entitled to severance compensation on a pro-rata basis.

A concrete example: an employee who worked for 3 years at a monthly salary of 7,000 NIS and was terminated without cause is entitled to severance compensation of 21,000 NIS (3 years × 7,000 NIS). However, if they worked for 2 years and 6 months, they are entitled to 2.5 months of salary.

Now, the salary on which the severance is calculated is not necessarily the base salary alone. The calculation also includes supplements that the employee received on a regular basis (fixed travel allowances, fixed monthly bonuses, fixed pensions, etc.). This is what is called "fixed salary for severance calculation purposes." A common mistake is to ignore these supplements — which results in calculating severance too low, which could subsequently lead to a claim by the employee or the tax authority.

If the termination is for disciplinary reasons (an employee who did something punishable), or if the employee is 65 years old or older under certain conditions, the severance may be lower or may not apply at all. This depends on the specific circumstances — and for this exact reason, it is advisable to consult with an accountant or employment advisor before reaching the termination stage itself.

Deductions and Reporting — What is an Employer Required to Do?

This is where things get complicated. When an employer pays severance pay, they cannot simply transfer the money and be done with it. There are mandatory deductions that apply to the severance.

First, income tax. Severance payments up to a certain amount (in 2026, the amount changes annually according to the tax authority's regulations) are exempt from income tax. However, if the severance exceeds this amount, the excess portion is subject to tax withholding. This is not something an employer can skip.

Second, national insurance. Severance payments are also subject to national insurance deductions at certain rates (note: this is not exactly the same as regular salary deductions). Here too, if the employer does not withhold correctly, they may remain liable to the national insurance.

Third, education and training fund. If the employee was in an education and training fund, there may also be deductions or payments to the fund on the severance.

All of these deductions must appear in the employee's final pay stub, and they must also be properly reported to the tax authority and national insurance. If the employer reports incorrectly, the tax authority may send a correction notice, and this can be painful — both financially and in terms of time and effort.

Ben Or Kook handles all of this reporting: correct calculation of deductions, preparation of a proper final pay stub, and filing reports with the tax authority and national insurance. This is part of our support in employee salary and termination matters.

Common Mistakes in Calculating and Reporting Terminations — How to Avoid Them

Based on our field experience, here are the mistakes we see most frequently:

• Calculating base salary only, without fixed allowances. Most employers forget that allowances provided on a regular basis (travel allowances, monthly bonuses, pensions) must be included in the salary for the purpose of calculating severance pay. The result: severance pay that is too low, and scrutiny from the tax authorities or a claim from the employee.
• Forgetting to deduct income tax on the excess portion of severance pay. If severance pay exceeds the tax-exempt amount, income tax must be deducted. The fact is that many employers do not do this accurately.
• Errors in National Insurance deductions. National Insurance on severance pay works according to a different formula than National Insurance on regular salary. If calculated incorrectly, it results in a debt to the National Insurance.
• Late or incorrect reporting to the tax authorities. An annual report that does not include severance pay in the correct column, or inaccurate reporting of deductions — all of this can lead to an audit.
• Forgetting to report to the National Insurance. The tax authorities are not the only ones who need to know about the terminations. The National Insurance also needs to be updated.
• Failure to properly document the reason for termination. If there is a later dispute about the type of termination (disciplinary or otherwise), weak documentation could lead to a legal and also tax problem.

Practical Example: Termination Process From Start to Finish

Let's walk through a concrete case. Amit, a licensed self-employed individual, in Petach Tikva decides to terminate an employee's employment after 4.5 years. The employee's monthly salary is 8,000 NIS, and in addition, they receive fixed travel allowance of 500 NIS monthly. The termination is without disciplinary cause.

Step 1: Calculate severance pay. Fixed salary for calculation purposes: 8,000 + 500 = 8,500 NIS. Severance: 4.5 years × 8,500 = 38,250 NIS.

Step 2: Check if income tax withholding is required. If the tax-exempt amount in 2026 is (for example) 35,000 NIS, then 3,250 NIS of the severance is subject to income tax withholding at approximately 20%. This is approximately 650 NIS.

Step 3: Calculate National Insurance deductions. National Insurance deductions apply to severance pay at a certain rate (different from wage-based National Insurance). This amounts to approximately 1,500–2,000 NIS, depending on the exact calculation.

Step 4: Prepare final payslip. The payslip must include the severance, all deductions (income tax, National Insurance, study fund if applicable), and finally — the net amount the employee actually receives.

Step 5: Report to the tax authorities. In the employer's annual report, severance must appear in the correct column (not as regular wages). Deductions must be reported accurately.

Step 6: Report to National Insurance. National Insurance must be updated with the termination details and severance amount.

Every step must be precise. If something is incorrect, it can lead to problems down the road — inquiries from the tax authorities, National Insurance debt, or even a claim from the employee if they feel they did not receive what they were entitled to.

When Should You Contact an Accountant Regarding Termination?

If you are an employer or HR manager, it is advisable to contact a certified public accountant at the following stages:

Before starting the process. If you are planning to terminate an employee, it is advisable to consult with an accountant or employment consultant before notifying the employee. They can help you understand your rights and the employee's rights, and estimate the amount you will need to pay.

During the calculation. If you have questions about calculating severance pay — how many years of employment count, which salary to use in the calculation, whether there are special deductions — this is the time to consult.

Before paying severance. An accountant can verify that deductions are correct, that the final payslip is accurate, and that all tax reporting and national insurance submissions are in order.

If there is a dispute or inquiry from the tax authority. If you receive an inquiry from the tax authority regarding termination reporting, an accountant can help you respond correctly and avoid penalties.

Ben Or Cook handles all of this — from advance planning through accurate calculations to complete reporting to the authorities. This is part of our payroll guidance service, and we help partners and companies in Petach Tikva and Ramat Gan avoid errors and complications.

How Ben Or Kok Assists with Employee Termination Management

Ben Or Kok guides colleagues and companies in Petach Tikva and Ramat Gan through every stage of the termination process. Beginning with advance planning — we help you understand your rights and obligations, and forecast the amount you will need to pay. At the calculation stage, we ensure that severance payments are computed accurately, including all standard additions and special deductions. During the payment stage, we verify that all deductions are correct — income tax, national insurance, continuing education fund — and the final payroll statement is accurate. Finally, we handle reporting to the tax authority and national insurance, ensuring there are no issues down the line.

This is not merely a service — it is ongoing personal guidance. If you have questions during the process, or if the tax authority sends an inquiry afterwards, we are here to help. Digital service and availability, whether in-person meetings or by phone, tailored to your needs.