What is a Tax Refund for Employees?

What is a Tax Refund for Employees?

A tax refund for employees is a sum of money that the Israel Tax Authority is obligated to return to an employee when the amount of tax withheld from their salary during the year exceeds their actual tax liability. In other words — if your employer withheld tax at too high a rate, or if you had expenses or tax credits that were not taken into account, you may be entitled to a refund.

In Israel, every employee receiving salary from one or more employers is subject to mandatory income tax withholding. The withholding is performed by the employer in accordance with tax tables updated by the Tax Authority. However, at the end of the tax year (December 31st), every employee must file an annual return or allow the Tax Authority to verify their tax calculation. If it is determined that too much was withheld — this is a tax refund.

When Are Employees Entitled to a Tax Refund?

An employee tax refund is due in several situations:

• Over-withholding: The employer withheld tax at a higher rate than actually required.
• Deductible expenses: The employee had professional expenses (such as courses, tools, professional clothing) that were not taken into account in the withholding.
• Tax credits: They are entitled to credits such as child tax credit, family burden credit, or charitable donation credits.
• Additional income sources: They received income from a side business or self-employment activity for which insufficient tax was paid.
• Investment losses: Securities or real estate trading that resulted in a loss that can be offset.

Typically, the tax refund review is conducted automatically by the Tax Authority when an employee files an annual return, or when the Authority audits the withholdings made by the employer.

How Does the Tax Refund Process Work?

The process begins when an employee files an annual return (usually Form 101) or when the Tax Authority issues an independent assessment. The Authority compares the amount of tax actually withheld against the calculated tax liability based on all the employee's income, expenses, and credits. If the withheld tax is greater — a tax refund is approved. The amount is transferred to your bank account, typically within several weeks to months, depending on the Authority's workload.

Who is Eligible for a Tax Refund for Employees?

Almost every employee in Israel may be eligible for a tax refund under certain circumstances. However, there are certain groups where the probability of a refund is significantly higher:

• Employees with additional sources of income: Employees who received self-employment income, severance pay, dividends, or other income on which no tax was withheld.
• Employees with professional expenses: Workers in fields such as consulting, teaching, technicians, or other professions where work-related expenses exist.
• Employees with tax rights: Parents of children, individuals with family obligations, or those who donated to registered associations.
• Employees who worked part of the year: Those who started or ended employment mid-year may be entitled to a refund due to over-withholding at the beginning or end of the year.
• Employees with over-withheld tax: When an employer withheld tax at a higher rate than required (sometimes due to outdated tax tables).

How to Check Tax Refund Eligibility?

Checking for a tax refund is not a complicated process, but it requires an understanding of your tax components. The simplest way is:

1. Gather documents: Obtain a pay stub from your employer (Form 106), confirmation of professional expenses (if any), confirmation of donations, and details of any additional income.
2. Contact a certified public accountant: A professional accountant can review all your parameters and determine if you are eligible for a refund. At Ben Or Cook office, we specialize in tax reporting for employees and offer you a free initial consultation to review your situation.
3. Check the Tax Authority website: If you have already filed an annual return, you can log into your personal area on the Tax Authority website (using your ID number and PIN) and see the status of your return and any tax refund owed to you.

It is important to note that a professional accountant can help you not only check existing eligibility, but also plan the coming year to minimize taxes and create conditions for a larger tax refund in the future, if you choose to do so.

Practical Examples — When Do Employees Receive Tax Refunds?

Example 1: Employee with Professional Expenses

Dan is an engineer with his own practice. During the year, he purchased professional tools worth 3,000 NIS and completed a training course costing 2,500 NIS. His employer deducted taxes based on his gross salary without accounting for these expenses. When Dan filed an annual report, a certified public accountant identified the professional expenses and submitted them as deductible expenses. As a result, Dan's taxable income was reduced, and he received a tax refund of approximately 1,500 NIS.

Example 2: Employee with Additional Income Sources

Sarah works as a manager at a high-tech company and received a monthly salary of 15,000 NIS. Additionally, she received self-employment income from consulting services totaling 20,000 NIS throughout the year. Her employer deducted tax on salary only. When she filed an annual report that included the self-employment income, it was determined that she owed additional tax on this income; however, after calculating all her rights and deductions, she ultimately received a tax refund of approximately 800 NIS.

Example 3: Employee with Tax Credits

Yochanan is the father of three daughters and received a monthly salary of 12,000 NIS. His employer deducted tax at the standard rate but did not fully apply the dependent child tax credit. When he filed an annual report with details of his children, a certified public accountant applied the full child tax credit in the report, and Yochanan received a tax refund of approximately 2,200 NIS.

Example 4: Employee Who Started Work Mid-Year

Michal started a new job in June. Her employer deducted tax based on a tax table that assumes employment for the full year. As a result, from June through December, excessive tax was withheld from her salary. When she filed an annual report for that year, a certified public accountant calculated her actual income (6 months only) and Michal received a tax refund of approximately 1,100 NIS.

As can be seen from these examples, tax refunds for employees can be substantial, but they require careful examination of all parameters. A professional certified public accountant will ensure you do not miss any opportunity.

Comparison Table — Parameters for Tax Refund for Employees

Note: This table presents general situations only. Each case is reviewed individually by a professional accountant in accordance with your specific circumstances.

Why Choose an Accountant from Ben Or Kook Office?

Ben Or Kook office specializes in assisting self-employed professionals, business owners, and companies in Israel for many years. We understand the intricacies of the Israeli tax system and can help you obtain all the tax refunds you are entitled to. Our services include:

• Comprehensive Review: We examine every detail of your tax situation to ensure you do not miss any opportunity for a tax refund.
• Proper Reporting: We file a proper and complete annual report, which increases the likelihood of tax refund approval.
• Personal Consultation: Each client receives personalized advice tailored to their unique circumstances.
• Digital Service: We offer convenient digital service, allowing you to communicate with us easily from anywhere.
• Complimentary Initial Consultation: Let us discuss your situation with no obligation or cost.

If you reside in Petach Tikva, Ramat Gan, or in the Central region, we are here to help you. Contact the office today and schedule your complimentary initial consultation.