This is intended to be a really high level explanation. Which I slammed out in the space of a few hours! While tired! And with a German tandem partner session in-between!
- It probably won’t answer all of your questions, but hopefully you will find it helpful just the same.
- I’m happy to answer more questions—just drop one in the comments.
- Please don’t rake me unduly over the coals for any spelling or grammatical errors. I decided to forgo extra proofreading in favor of (a) getting this out to you and (b) going to bed. Feel free to point them out…but gently. ☺
The purpose of the form is similar to that of a W-2 in the US. These are issued by employers to employees at year-end and detail out (1) amounts paid to employees, be it in cash or in-kind (2) various fund contributions made by the employer and (3) amounts withheld from your salary.
The funky numbers in parentheses next to each item correspond to fields in the Form 1301, the Israeli individual tax return.
The following is a brief overview of the key sections of this form. Again—high level and I’m not covering everything, but this should hit most of the sections likely to be relevant to the average employee.
Salary & Wages (הכנסת עבודה)
This section details all taxable amounts paid to you for your work. The section includes several lines, but for most of you, the first line of this section, salary and wages (משכורת) is likely to be where you will see a number. Salary and wages includes:
- Your gross salary
- In-kind payments (שווה כסף) paid to you or on your behalf that are subject to tax. These will appear on your monthly paystub as they arise over the course of the year. Common examples of these types of items (in Hebrew) are:
- Gifts for holidays and personal events (שווי מתנות) (The tlushim you just received for Pesach? They will be in there!)
- Meals provided by the company (e.g. if you receive a 10Bis card or the company provides lunch) (שווי ארוחות)
- Company cars (שווי שימוש ברכב)
- Company telephone (שווי טלפון נייד)
- Contributions made by your employer to your pension or continuing education fund in excess of the amounts that are tax exempt. (שווי קצבה)(שווי קרן השתלמות)
The additional lines in this section are for salaries and wages which are subject to special tax rates. These include salary and wages paid to someone who has an tax exemption due to disability, wages paid for industrial shift work, other tax exempt payments and the like.
To get a better idea of where the numbers come from, here is a little exercise. Take your December 2016 paystub. Somewhere on there, you should have section with YTD totals (נתונים מצטברים). In that section, you should see a lines for payments (תשלומים), in-kind payments (שכר שווה כסף) and taxable income (חייב מס הכנסה). If you tally up your payments and in-kind payments, you will see that these total your taxable income AND that your taxable income here should equal the amount you see in the Salary & Wages section of your Form 106.
Pension (קופות גמל)
This section covers employer contributions to your pension fund (קצבה), employer contributions on account of your pension and severance pay (פיצויים) combined (see comment below), to continuing education fund (קרן השתלמות) and to disability insurance (אי כושר עבודה). For each item, it shows:
- the portion of your salary used as a basis for calculating amounts to be contributed ( סה”כ הכנסה מבוטחת) and the portion that is excluded (משכורת ללא סוציאליות);
- the rates at which the contributions are calculated (שיעור הפרשת המעביד ל…);
- the total employer contribution (הפרשת מעביד ל…); and
- the portion of each contribution, if any, which is taxable. Note that any taxable amounts are going to be part of your in-kind payments balance, discussed above.
One point that can be confusing—at least on my company’s Form 106—is the section that covers the pension and severance. First you see the pension rate and contribution on a standalone basis and then, instead of showing the severance rate and contribution on a standalone basis, you simply see total contributions to pension and severance together (הפקדה מעביד לקצבה ופיצויים). Just remember that the total employer contributions here are not the standalone pension contribution plus this second number; it’s just this second number!
Exemptions and Credits (פטורים וזיכויים)
In a nutshell, this section details out your tax points (נקודות זיכוי) and other items which have been applied by your employer against the amount of taxes that they are required to withhold at source.
First, and most importantly, tax points…. The Form 106 will show the number of tax points you had in total during the year. Men automatically start out with 2.25 points per month (27 per year) and women with 2.75 per month (33 per year). One can receive additional points based on one’s marital status, parental status, receiving a degree, being a new immigrant or having recently finished army service and so on. The Form 101 that you fill out in January of each year includes a list of these options and is used by your payroll controller to check that you have the right number of points. So yes, it is actually worth your while to fill out the Form 101 promptly and, like, pay attention to the details and all that and not do a half-assed job and then get pissed at the payroll controller because you were supposed to get another point but didn’t. (If you are a payroll controller, you’re welcome! Love ya!)
How do these work? Al regel echad, think of them as a sort of coupon which you use to get a discount off the full price of your taxes. Let’s look at a sample month.
- We calculate your total taxable income (discussed above).
- We then calculate your total taxes on your taxable income. We do that using a tax table (מדרגות מס). So the first NIS 6,220 of your monthly income will be taxed at 10%, the next NIS 2700 at 14%, the next NIS 5,400 at 20% and so on, up to the highest tax rate of 47%, for portion of your monthly income in excess of NIS 41,410. Let’s assume that this results in a tax bill of NIS 6,000.
- Now, imagine you have this bill in your hand and you are walking up to a cash register to pay. Before you whip out your wallet, you hand the clerk your coupons, or tax points. Each point is worth NIS 215. The clerk will now deduct this “coupon” from your tax bill. The net cost will then be NIS 5,516 for a man (6,000 tax less (215 x 2.25 points)) or NIS 5,409 for a woman (6,000 tax less (215 x 2.75 points)). Now you pay. ☹
In addition to tax points, the state allows for employers to make additional deductions or apply preferential tax rates based on things such as one’s places of residence (e.g. folks living in the periphery can receive reduced tax rates), charitable contributions, disability and so on.
Before you get all excited and think you can run to your payroll controller tomorrow and get her to reduce your taxes because of where you live or whatever, bear in mind that there are rules to this game. Employers are allowed to apply certain credits at source BUT this is subject to meeting certain standards of documentation, and may require that you bring a certificate from Mas Hachnasah confirming that you are eligible for a given reduced rate or additional points.
One quick aside…. A common question is “my salary went up/ my salary went down/ I got a big bonus mid-year… how do I know my taxes are correct”. Each month over the course of the year, your payroll controller (via the approved payroll program they are using to calculate salaries) is doing a year-to-date calculation of your tax bill, again, based on the tax table, tax points and amounts you paid in prior months.
This section details all of the amounts that have been deducted from your gross salary during the year. This includes:
- Income tax (מס הכנסה)
- National Insurance (ביטוח לאומי)
- Health Tax (דמי בריאות)
- Pension Fund (קופת גמל)
Two points worth noting…. At least in my company’s case, National Insurance and Health Tax are broken out in the Form 106 but are combined into a single line item, National Insurance (ביטוח לאומי) in the YTD data in my December paystub. So if I want to check out that the numbers match, I need to add up the two numbers from my Form 106 and compare it to the National Insurance line in the YTD data. Second, at least in my Form 106, my Continuing Education fund contributions are not listed as a deduction, even though this does show up in my paystub. This is most likely because there are no tax ramifications for this amount. It’s paid in after tax and is not the basis for any tax credits.
There you have it, your super-duper high level explanation of “what in the name of G-d is this wretched form trying to tell me”. It is, again, a very general overview, so don’t feel bad if you have more questions. Feel free to ask—just stick them in the comments and I’ll be happy to assist if I can.