Frequently Asked Questions About Payroll — A Complete Guide

Why Payroll is Not a Secondary Matter

Payroll is one of the most important issues in your business or work — both as an employee and as an employer. A payslip is not just a document that transfers money; it is an official report that documents all contributions to national insurance, pension, training fund, and of course the tax withheld. An error in the process can lead to complications with the Tax Authority, convincing claims from employees, or debts that should never have existed.

In 2026, as more and more businesses have transitioned to digital reporting and companies use payroll management software, the importance of properly understanding the process is increasingly vital. It is not enough to operate the system — you need to know what it does and why.

In this guide, we will address the most frequently asked questions from self-employed individuals employing workers, companies of all sizes, and employers who want to understand their payslips. We will start from the basics and move to more complex topics — because everyone needs to understand the game before they play it.

What is Payroll Accounting and Who is It Relevant For

Payroll accounting is the process of calculating, managing, and reporting employee salaries. It encompasses everything: from calculating gross salary, through mandatory deductions (income tax, national insurance, education fund), to preparing pay slips and reporting to authorities.

If you fall into one of the following categories, this guide is for you:

• Self-employed individuals with a business who employ workers — you are required to maintain proper payroll accounting.
• Company or association owners — whether you have one employee or ten, the reporting process is the same.
• Salaried employees who want to understand their pay slip — sometimes there are errors or unclear deductions.
• First-time employers who are unsure where to begin.

The key point: payroll accounting is not optional. If you have an employee, it is a legal obligation. If you are a salaried employee, it is your right to understand every deduction on your pay slip.

How to Process Employee Payroll — Step by Step

Here is the general process that should occur each month or pay period:

1. Employee Information Collection — name, ID number, position, base salary, benefits (vehicle, health insurance, etc.).
2. Gross Salary Calculation — base salary + overtime hours / bonuses / benefits given as monetary value.
3. Income Tax Deduction — in accordance with the income tax table and the employee's personal benefits (children, marital status, etc.).
4. National Insurance Deduction — fixed rate from salary, up to an annual ceiling.
5. Training Fund Deduction (if applicable) — usually 7.5% of salary, deducted from employee and partially from employer.
6. Additional Deductions — loans, family appeals, wage garnishment (if there is a court order).
7. Net Salary Calculation — gross salary minus all deductions.
8. Preparation of Payslip — official document detailing all the above information, with signature or digital seal.
9. Reporting to Authorities — submission of monthly/quarterly reports to the Tax Authority, National Insurance, Bank of Israel (as needed).

Each step is important. If you miss a deduction or report incorrectly, it can lead to problems later on — check earlier, and it will save you a lot of headaches.

What You Need to Know About Taxes and Reporting

This is the issue that concerns many employers: exactly what do you need to report and to whom? In short — you need to report to three authorities:

Tax Authority: Every month (or quarter, depending on the scope), you must submit a report on the wages you paid out, the deductions you made, and details on each employee individually. This is not just information — it is a declaration with a digital signature. If you are self-employed with a business, you must also pay tax advance payments as an employer.

National Insurance Institute: They need to know about every employee and the deductions made. This affects the employee's rights in the future — if they apply for a pension or unemployment benefits, they will search our records.

Bank of Israel: If you pay wages through bank transfer (which is the case in most situations), they receive reports on the transactions.

One point that is not always clear: as an employer, you are responsible for reporting, even if you use software or an accountant. The software is a tool — you are responsible. If there is an error, it is on you.

Common Mistakes and How to Avoid Them

Over the years, we see the same mistakes repeated over and over. Here is the list:

• Failure to deduct National Insurance or Pension Fund. This happens when using outdated software or when hiring a new employee without verifying all details. The result: an employee who did not receive all their rights, and an incorrect report to the authorities.
• Incorrect calculation of income tax. The tax table changes every year, and there are different benefits depending on marital status. If you do not update the table in your software, you may deduct more or less than required.
• Failure to account for overtime or bonuses. An employee who worked overtime and received a bonus, but it did not appear on their payslip. This is not just a personal issue — it affects the calculation of tax and National Insurance.
• Late or inaccurate reporting. If you report to the Tax Authority late, it can lead to penalties. If you report incorrect information, it is an even bigger problem.
• Misunderstanding the difference between gross salary and net salary. Most employees want to know how much they receive per month. Net salary is what they actually receive in their bank account. Gross salary includes all deductions that are not due to them.
• Unlawful deductions. Not everything an employer wants to deduct is lawful. For example, a deduction for loss or damage must be verified in writing.

When Should You Consult an Accountant

Not every employer needs an accountant to manage payroll. If you have one employee on a fixed salary and everything is straightforward, good software may suffice. However, there are situations where it is essential:

If you have more than one employee — complexity grows quickly. Each employee may have different conditions, different benefits, and so on. This can rapidly become chaotic.

If you have complex benefits — company vehicles, health insurance, company loans, variable bonuses. Each of these requires precise calculation.

If you are unsure about your calculations — this is a sign that you need professional assistance. It is better to pay an accountant now than to correct years of errors in the future.

If you are a self-employed person with a business — you not only need to manage payroll for your employees, you also need to manage your own accounts as an employer. This requires an understanding of tax advances, annual reports, and more.

If there are changes in law or tax rates — every year there are updates to tax rates, national insurance, and training fund. An accountant keeps track of this as part of the job.