Payroll for Businesses — Everything You Need to Know

Why Payroll is Important for Your Business

If you have employees, you must issue a payslip each month. This is not just a document for the employee — it is a mandatory report to the Tax Authority and National Insurance. An error in a payslip can lead to an audit, fines, or even debt to the employee.

Most business owners we encounter begin managing payroll themselves, especially when they are small. This makes sense — you know your employees, you know the salaries. However, when the business grows or when you begin using salary supplements (allowances, bonuses, overtime), it quickly becomes complex.

This guide will help you understand how payroll works, what must be included in a payslip, and which common mistakes are easy to avoid. In the end, you can decide whether this is something you should manage yourself or transfer to a payroll accountant.

What is Payroll and Who It Applies To

Payroll is the management of employee salaries, deductions, and reporting obligations. Each month, you must:

• Calculate salary based on hours worked or a fixed salary
• Deduct income tax, National Insurance, and training fund
• Issue a payslip to the employee
• Report to the Tax Authority and National Insurance

Who needs to manage payroll? Every business owner who has salaried employees. This includes:

• Limited liability company owners — they themselves work in the company and receive a salary
• Registered sole proprietors — who have salaried employees
• Non-profit associations — that have a staff
• Self-employed individuals — who employ workers themselves

If you employ even one employee, you must provide a payslip. This does not depend on the size of the business or the type of activity.

How to Calculate Employee Payroll — Step by Step

Here is a basic process for managing monthly payroll:

1. Collect data — work hours, bonuses, allowances, vacation days taken. If you have a timekeeping system, this will be easier.
2. Calculate gross salary — basic salary plus all additions. If an employee worked overtime, calculate it according to the overtime rate.
3. Calculate mandatory deductions — income tax (according to tax table), National Insurance (usually 7.65% of salary), study fund (usually 5% or 8.33% depending on agreement), and security deposit if applicable.
4. Calculate net salary — gross minus deductions.
5. Issue a pay stub — a document showing all details: employee name, date, gross salary, all deductions, net salary.
6. Report to tax authorities and National Insurance — usually monthly or periodic reporting, depending on business size.
7. Pay the deductions — income tax and National Insurance must be paid to authorities on certain dates. This is not your money — it is employee money that you have withheld.

This sounds complicated, but in practice, if you use organized software or a spreadsheet, it becomes routine.

What Must Be Included in a Payslip

A payslip must contain specific information. If anything is missing, it is not a legal document and it is difficult to prove that you have reported correctly to the authorities.

A payslip must include:

• Employee name and ID number (or employee number in the company)
• Date of payslip and work month
• Base salary and additions (bonuses, allowances, overtime)
• Total gross salary
• Mandatory deductions: income tax, national insurance, training fund
• Other deductions if applicable (security deposit, loans, garnishment)
• Total deductions
• Net salary (what the employee actually receives)
• Employer signature or stamp (in software, this can be a digital signature)

If you use professional payroll software (such as cloud-based payroll management), it usually includes all these details automatically. If you work with a spreadsheet, ensure you have a template that contains all the required data.

Mandatory Deductions — What You Need to Know

When calculating salaries, you must deduct certain amounts. This is not optional — these are legal obligations.

Income Tax — Every salary is subject to income tax. The rate depends on the salary level. The Tax Authority publishes a tax table every year showing how much to deduct based on salary and number of dependents. For example, an employee with no dependents and a salary of 5,000 NIS may have a deduction of approximately 400-500 NIS (check the official table). This deduction must be sent to the Tax Authority.

National Insurance — Every employee must pay national insurance contributions. This is typically 7.65% of the salary (up to a certain ceiling). This portion is deducted from the employee, and an additional portion (typically 3.45%) is paid by the employer (you). You must pay both portions to the national insurance.

Training Fund — Usually 5% of the salary (or 8.33% under a different agreement). This is deducted from the employee and must be paid to the fund in the following month.

Security Deposit — In certain businesses (mainly construction), there is an obligation to retain 5-10% of the salary as a security deposit. This is released at the end of the employment period.

Important note: Employee deductions (income tax, national insurance, training fund) are not your money. You must pay them to the authorities on fixed dates. If you fail to do so, you may be subject to penalties.

Reporting to the Tax Authority and National Insurance

Every month (or during certain periods), you must report data for each employee. This is not a once-a-year report — it is periodic reporting.

Monthly Payroll Report — You report to the tax authority on all salaries, deductions, and taxes withheld. Usually this is through the tax authority's portal (digital work station).

National Insurance Report — Separate reporting on salary and national insurance. This is also monthly or periodic reporting, depending on the size of the business.

VAT Report — If you are a VAT registrant, salaries are not included in the VAT report, but you should ensure that the reports are consistent.

If you use professional software, it usually exports reports in a format that the tax authority accepts. If you work manually, you must be careful to report on time — late reporting can lead to penalties.

Common Mistakes in Payroll Management

Over the years we have worked with business owners, we have seen mistakes that repeat themselves. Here are the most common ones:

• Incorrect income tax withholding — Using a tax table from the previous year or a calculation error. The tax table changes every year, and if you do not update it, the withholding will be inaccurate.
• Omissions in the payslip — A payslip that does not contain all deductions or is not signed. This creates a problem if there is a dispute with the employee.
• Late payment of deductions — Deductions taken from the employee are not paid to the authorities on time. This can lead to fines and interest.
• Failure to report bonuses or supplements — Every salary addition must be reported. If not reported, it may appear as tax evasion.
• Manual management without an organized spreadsheet — When you manage everything in your head or in phone notes, it is easy to forget or make mistakes. An electronic spreadsheet or software reduces the risk.
• Failure to maintain documentation — If the tax authority asks, you must prove that you reported correctly. If you do not have documentation, it is a problem.
• Forgetting to update the education fund or national insurance — Issuing a payslip but not transferring the deductions to the authorities.

The best way to avoid mistakes is to use software, be diligent about timely reporting, and maintain accurate documentation.

Payroll Management Software and Tools

If you're starting to manage payroll on your own, you don't need to start from scratch. There are tools that can help you:

Spreadsheet (Excel / Google Sheets) — If you're a small business owner with a few employees, a spreadsheet with formulas can help. A good template will automatically calculate deductions and amounts. The downside: you need to understand Excel somewhat and update the tax table every year.

Cloud-based payroll management software — There are several applications in Israel specializing in payroll management for small to medium-sized businesses. They typically include: automatic salary calculation, payslip export, automatic reporting to authorities. Cost: typically a few hundred shekels per month depending on your business.

Accountant or accounting firm — If you don't want to deal with it at all, you can outsource all payroll management to a professional. This typically includes: salary calculation, payslip issuance, reporting to authorities, and consulting on complex matters.

Ben Or Cook Accountants, for example, manage payroll accounts for businesses of all sizes — from a single employee to a large team. If you're in Petach Tikva, Ramat Gan or in the central region, you can arrange a meeting to discuss your options.

When Should You Consult a Payroll Accountant

You are not required to outsource payroll management to a professional, but there are situations where it is advisable:

If you have more than 5 employees — as the number of employees grows, management becomes complex. Reports, various deductions, issues with individual employees — everything becomes complicated. A payroll accountant can handle all of this for you.

If you have legal foreign workers — reporting foreign workers has special regulations. If you do not handle this correctly, you could face significant fines.

If you have issues with the Tax Authority or National Insurance — if you have received a letter from the Tax Authority or have a debt with National Insurance, this is the time to consult a professional. They know how to handle this.

If you are uncertain about calculations — if you are unsure whether you are doing things correctly, it is better to verify with a payroll accountant. This can save you problems in the future.

If you want to focus on your business — in short, if your time is worth more than the cost of a payroll accountant, it is worthwhile to outsource.

Summary — How to Get Started

Managing payroll accounts is an important part of running a business. If you do it correctly, you reduce the risk of problems with the tax authority and national insurance. If you do it incorrectly, it can be very expensive.

If you are self-employed or own a small business with a few employees, you can start on your own with a spreadsheet or basic software. If you want peace of mind or if your business is larger, it is better to hand it over to an accountant.

Ben Or Cook Accountants help businesses of all sizes with payroll management — from one employee to a large team. If you are in Petach Tikva, Ramat Gan or in the central area, you can schedule a free initial consultation to discuss your needs.