This post was originally published in The Times of Israel
Having ridden the (full-time) freelance rollercoaster for almost two years now (and the part-time one several years longer), I feel qualified to dispense a little advice about what’s needed to get going working for yourself- and stay that way if that is what you desire.
I’m explaining how to become ‘self-employed’ — although you could equally say that you’re starting an unincorporated business or setting out to be a freelancer (if that’s the terminology you prefer, see Nadia Katzir’s guide on the topic here).
In fact, it’s probably better to think in those terms whatever you do.
Because there’s nothing stopping a restaurant from being an osek murshe (VAT-charging small trader). Although, if we’re going into what can and cannot be done, then you should also know that a dentist or accountant cannot be an osek patur (VAT-exempt small trader).
But (in my opinion) even full-time freelancers should see themselves as small sole business owners rather than members of the gig economy. Even if they are a one person operation. If it’s a full-time job, you should take it seriously — including the descriptor that you use to describe yourself to the world.
The foregoing aside, I am not an accountant — and so I’m not going to go into detail about tax and other matters that you should receive professional advice for — or advice from multiple parties.
But I strongly recommend that, at the bare minimum, you hire an accountant — even if you’re just starting out at the osek patur level and yes, even if you’re just doing it part time.
There’s too much that you can screw up and — if you’re leaning on your accountant to update several records with you over the course of a year — the money is likely to prove a stellar investment.
With that disclaimer aside, here’s the following — just to provide the general picture of what’s required.
Register with Mas Hachnasa (the tax authority) and Ma’am (VAT)
The first port of call on one’s journey towards atzmai (independent trader) largesse (just kidding, well, hopefully not!) is paying a visit to the tax authority to open a tik (file).
You can do this yourself — I did — but , like me, there’s a good chance that you will find the whole process overwhelming. If your accountant includes filing the opening paperwork as part of an annual retainer-or will do so for a small extra- then why not use them all the way?
Because you’ll be put on the spot by short-tempered bureaucrats trying to keep a line moving you might also make stupid and rash decisions that you will later regret — such as declaring your official business name as the rather uninspiring and unoriginal ‘Daniel Rosehill Freelance Writing & PR Services.’ Don’t do that!
If you do opt for the self-service route, then find out where your nearest רשות המיסים building is and when it processes independent trader registrations (this is important: like everything else in Israeli government their opening hours are limited).
During your little sortie to the tax office you’ll also need to swing by the good people at the Ma’am (VAT) desk. So pack a sandwich or two and prepare for a fun-filled morning of pulling numbers out of queue systems and a lot of waiting in line. But unless somethings goes wrong, this can all be completed in one convenient field expedition.
You’ll need to have a figure ready with how how much you expect to earn each month. If this new business venture is going to be your only gig, then this will be used to calculate the tax band at which you will pay מקדמות (tax advances) — if you choose to do so or that’s what the tax authority decides is best. So do some projections and pick a likely number.
Alternatively: hire an accountant!
What you will do:
- Fill out a couple of forms and wait in line for an hour or two. Or meet with an accountant who will explain all of this in much more detail.
What you will get:
- Your registration certificate attesting to the opening of your file and that you are now officially an atzmai.
- A certificate attesting to what percentage of your declared income is being deducted at source (אישור על ניכוי מס במקור)
2. Register with Bituach Leumi
The other band of people that will be interested to know about your meteoric rise into the ranks of the self-employed and atzmaim of this country will be the good people down at Bituach Leumi (social security).
Mercifully, this process can be conducted remotely. You just need to fill out Form 6101.
Bituach Leumi (as well as much of the Israeli government) have actually invested in good technology designed to make your life simpler (no, that wasn’t a joke). So it makes sense to fill their online form even if — due to the current circumstances — they decided that they want to see you face to face.
Alternatively: you can ask your accountant to do this for you. And, if your average monthly income rises, as it hopefully will, you can ask your accountant to amend the contributions directly with Bituach Leumi.
What you will do: Tell Bituach Leumi that you are self employed.
What you will get in return: The privilege of being able to pay them monthly contributions.
3. Set Up a Kupat Pensia
The freelancers of this country used to be having a grand old time doing what freelancers do best: Scraping by month to month without sparing a thought to that ominous time in the future when their teeth will start falling out and they realize that they haven’t contributed an agura (cent) to a pension fund since … well, since ever.
Well, scratch that mental image.
Seeing that mass impoverishment could agitate the already agitated freelancing class possibly to the point of causing social unrest, the wise old heads at the Ministry of Finance decided several years ago to make pension contributions mandatory for the self-employed as well as those that don’t work in their pajamas every day (yes, that’s you, salaried people).
While this meant that freelancers would earn even less than they already do on a monthly basis it also meant that they could afford to replace their teeth in forty or fifty years when they started falling out. Meanwhile, they could allow their pension fund to professionally manage their investments. A win-win you might say!
While there is an obligation to contribute to a pension (speak to an accountant for the minimum percentages; the requirement is relatively new and these figures might change) you are not obligated to do so through a pension agent even if many slick-talking pension agents might leave a very strong impression that that is not the case.
Meitav Dash is a popular option for those that favor the self-service approach. It only took me fifteen attempts to move in a kupat gemel and a pension but I am glad that I persevered (the form screw-ups were none other than my own).
What You Need To Do After That
You are registered now. Mazal tov.
But the administrative fun is only getting started!
If you do business in Israel your clients will begin asking you for all manner of strange ishurim (אישורים — confirmation forms) in order to pay you.
You might, variously, be asked for your:
- אישור עוסק פטור (to confirm that you are a registered osek patur / osek murshe)
- אישור ניהול חשבון (to make sure that the bank account is really yours!)
- אישור הנהלת ספרים (to confirm that your accountant is your authorized representative)
- אישור ניכוי מס במקור
Among many others.
Just as when you registered, if you are going to meet your legal obligations you need to maintain a liaison relationship (okay, you will need to pay) the following people:
And you will need to report to Ma’am as an osek patur and reconcile VAT payments with them if you are a murshe.
And here’s what each liaison relationship entails:
- Mas Hachnasa: This is the big one. You’ll need to send them in an annual report. I’ve always used my accountant to do this. You’ll need to keep track of all your receipts and expenses and pay the tax owed on your profit. Alternatively, if you’ve paid tax in pre-payments (mikdamot ) then Mas Hachanasa will reconcile the difference (with a small amount of interest either way) and you’ll pay on that. Bituach Leumi will do likewise. There is also a very high chance that they will ask for a statement of capital assets (הצהרת הון) from you.
- Bituach Leumi: As your business blooms (or tanks) you may want to periodically update Bituach Leumi with what you are earning so that they can adjust your contributions. You can put this on your credit card or pay by direct debit. Just make sure to set it up so that you don’t wind up with a massive bill.
- Ma’am (the VAT office): Once a year these good folks will need to know whether you are above or below the limit above which you can no longer be VAT exempt. This report can be submitted online in about two minutes — you simply report your previous tax year’s gross income. At the time of limit that figure is 100,491 NIS ( source: כל זכות) . Divided by 12, that figure works out to 8,337 NIS a month. So if you’re earning approximately 8,500 NIS or above then you will need to “upgrade” your tax status at some point.
- Pension: You can either choose to contribute monthly or move your contributions in once per year. You should work with your accountant to make sure that you are contributing at least the minimum required contribution. Although you should also know that there is a maximum allowed contribution too.
And You’ll Need to Start Bookkeeping
The final thing you will need to do in order to get the ball rolling and keep it going is set up on an accounting platform.
Yes, you can be old school and buy a פנקס קבלות with your business details on it — but, as a technology writer, I cannot bring myself to tell you how to do that (hint: Google it!).
Don’t waste paper — step into the modern era and whether you’re a plumber or a life coach start issuing your invoices digitally.
The catch here is that you must use an accounting platform which the tax authority (namely Rishut HaMisim) has deemed compliant with their bookkeeping standards.
Some of these are:
- GreenInvoice
- Invoice4U
- SmartBee
- Rivhit
- Ezcount
There are many options out there.
But I recommend Green Invoice, although it only has a Hebrew web interface. If you need help using it and getting going with basic things like issuing invoices and quotes, I made this screencast recently (in English) explaining how to do those things.
Happy Self-Employment!
Given the current precarious economic climate, there is a lot of interest in freelancing — whether as a result of a lay-off or because people just like the idea of adding a little on top of their current income. If you’re doing the latter, then you’ll need to state that on your טופס 101 (form 101) if you sign up for an employer. Your income, for tax purposes, will be reckoned cumulatively — so you could find yourself pushed up a band by putting the two together.
Israel gets a bad rap for its bureaucracy.
But overall, I do not find the process of being self-employed overly onerous — even if the administrative requirements I face are modest compared to some.
I strongly recommend working with an accountant.
Rather than as a simple tax-filer, find a good one and think of him/her as a guide through what can (at first) appear like a maze of forms and bureaucracy. If you can ask them questions periodically (if they don’t have time, perhaps somebody more junior in the office does) then that can be a massive help. It’s worth paying an accountant just to have somebody you know will answer the odd email query.
American citizens face some additional complications due to the extraordinary extraterritorial reach of the IRS and tax treaties in place between Israel and that country.
However, as a non-citizen I have thankfully never had to deal with that additional quagmire. Just these ones. And the question of what to do if my teeth start falling out.
And some closing tidbits:
- As an osek patur you cannot (legally) charge VAT. You issue VAT-free invoices. Assuming your client is a מע”ם or not VAT exempt and they send you a copy of the purchase orders that their payroll raises you will notice that their payroll is adding these over the top anyway. You just don’t have to reconcile on your end.
- When you hit the level of an osek murshe you do not charge international clients VAT.
- Assuming you have international clients (you should!) then make sure that your invoicing platform can issue documentation in English. You can also use a second system, like Wave, in parallel. It just creates a bit more work for yourself.
- Again, if you have international clients, you should set up an account on TransferWise and create virtual bank accounts overseas in order to move money in to your local bank account.
- You don’t, legally, need a separate bank account if you are an atzmai. In fact you may have difficulty convincing your bank to let you open one.
- Don’t forget to capture your expenses. I repeat: do not forget to capture your expenses.
Behatzlacha!
