Your Taxes: Government grabs an employee fringe benefit

The government apparently needs to finance the war partly at the expense of employees – notwithstanding the lengthy service of many on IDF reserve duty.

 Illustration of  Israeli shekels, September 24, 2023 (photo credit: HADAR YOUAVIAN/FLASH90)
Illustration of Israeli shekels, September 24, 2023
(photo credit: HADAR YOUAVIAN/FLASH90)

The Knesset has passed a law to make employers divert parts of the statutory recreation bonuses payable to employees (havraah) and hand them over to the government as an additional hidden tax (Law to Freeze Recreation Bonuses in 2025).

On May 14, the Israel Tax Authority (ITA) issued a commentary on the subject.

The government apparently needs to finance the war partly at the expense of employees – notwithstanding the lengthy service of many on IDF reserve duty.

The recreation bonus is a very Israeli fringe benefit, dating back to Israel’s socialist past. It usually amounts to a few thousand shekels per employee and is usually paid each July to give employees some extra spending money for vacations, etc. Sometimes, employers spread this bonus out over the entire year, while sometimes, they instead cover the cost of hotel accommodation.

How is the recreation bonus calculated?

Employees generally become entitled to the recreation bonus once they have worked 12 months for a particular employer. The amount is usually updated for inflation each July – but not this year.

 New Israeli Shekel banknotes are seen in this picture illustration taken November 9, 2021 (credit: REUTERS/NIR ELIAS)
New Israeli Shekel banknotes are seen in this picture illustration taken November 9, 2021 (credit: REUTERS/NIR ELIAS)

The amount due is expressed in units known as days, which increase the longer an employee has worked for the employer. Each day is worth NIS 418 in the private sector or NIS 471.40 in the public sector.

The number of “days” credited to an employee is: five days at the end of the first year of employment; six days in years two and three; seven days in years four-10; eight days in years 11-15; nine days in years 16-19; 10 days in year 20 onward.

For example, an employee in year five at a private-sector employer is entitled to seven days times NIS 418, i.e., NIS 2,926 gross before tax.

A pro rata calculation is done for part-time employees and employees paid on an hourly basis.

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So, the amounts paid to employees are not huge, but they are nice to have at vacation time.

Effect of the new law

The new law actually reinstates and extends in 2025 a temporary law that applied in 2024. The amounts carved out of the recreation bonus are really a tax but are called “participation amounts.” There are two types of “participation amount.”

First, employees generally forfeit a “recreation price” of one day of the recreation bonus. If they earn less than NIS 6,150 per month in 2024, they forfeit only half a day.

Second, the recreation bonus is pegged at 2024 levels, but the employer must hand over the difference between the pegged and unpegged recreation bonus. This includes National Insurance Institute payments on the amount of the difference.

How does it work?

The employer must hand over the recreation bonus participation amounts via the payroll withholding tax system. If the bonuses are paid in cash, the participation amounts are payable to the ITA, along with July 2025 payroll withholding taxes.

Extra data regarding the recreation bonuses are best reported online by the employer or the employer’s accountant (or other representative), but specific contact can be made at a local tax office.

If the employee is paid the recreation bonus in kind, e.g., by paying a hotel, the employer must still calculate the recreation price (tax) – either NIS 418 or NIS 471.40 – and withhold it from other benefits paid to the employee. All this is pursuant to Section 247 of the Income Tax Ordinance.

Employees will be relieved to know that participation amounts (i.e., tax) are not themselves taxed. Also, the participation amounts are not taken into account when calculating pension fund contributions.

Office holders

Office holders (i.e., directors) are not off the hook; participation amounts must be handed over to the ITA on their behalf too. This is especially relevant to owner directors of private companies who probably don’t bother to pay themselves recreation bonuses.

Other points in the ITA commentary

Employment agreements that postpone payment of recreation bonuses to a date before or after 2025 are invalid.

If an individual holds down two jobs, each employer applies the above rules. This apparently means double payment of NIS 418/NIS 471.40 to the ITA.

If an employer managed to pay recreation bonuses before the law came into effect, the participation amounts are still due, along with the July 2025 salary – unless the employee left and was all paid up before the law came into effect.