Your first year as a freelancer in Israel

Guide · 4 minute read

Becoming self-employed in Israel is three registrations, a bookkeeping decision and a calendar. None of it is difficult. Almost all of the pain in a first year comes from doing one of the three registrations late, or from discovering in month eleven that the records needed for the annual return were never kept.

The three files

VAT. Register at the VAT office as an osek patur or an osek murshe. This is the registration people mean when they say they opened a business, and it is the one that determines whether you charge VAT. Which status suits you is covered in osek patur or osek murshe.

Income tax. Open a file at the Tax Authority. This is what obliges you to file an annual return and, once there is a profit history, to pay advances during the year.

National Insurance. Register as self-employed with Bituach Leumi and declare your expected income. This one is skipped most often, because nothing stops you from trading without it, and it is the one that produces a retroactive bill with interest. It also affects your entitlement to benefits, so being unregistered is not a saving, it is an uninsured gap.

All three can be done in a single week, and the sensible order is VAT first, because the other two ask for your dealer number.

Which books you have to keep

The bookkeeping requirement depends on your line of business and your turnover, and for most small service businesses it means single-entry bookkeeping: a record of income, a record of expenses, numbered receipts, and the documents behind both. Trade and manufacturing carry heavier requirements, including inventory records.

Whatever the level, three obligations apply from day one. Documents are issued in unbroken numbered sequences. Every entry is backed by a document you keep. And the records are retained for seven years, in a form that cannot be quietly edited afterwards.

The first month, practically

1. Open the three files.
2. Open a separate bank account or at least a separate card. Not a legal requirement, and the single highest-value hour you will spend.
3. Decide how you will issue documents, and check that the method produces a real numbered sequence.
4. Start photographing receipts immediately, including the ones from before you registered. Setup costs may be claimable, and only if you can produce the document.
5. Ask your accountant which reporting frequency applies to you and put the dates in a calendar with reminders.

Advances, and the year-two surprise

Income tax in a first year is usually paid at the end, because advances are set from a previous return and you do not have one yet. That produces a pleasant first year and an unpleasant second: the annual bill for year one arrives at roughly the same time as the advances for year two begin.

The defence is arithmetic, not optimism. Put a fixed percentage of every payment you receive into a separate account and do not treat it as income. The correct percentage depends on your bracket and your National Insurance rate, and your accountant can give you a number in five minutes. Any number you actually set aside beats a better number you did not.

What it costs to run

Budget for an accountant. A basic annual arrangement for a small self-employed business covers the annual return, the periodic reporting, and someone to ask before you do something irreversible. Doing it yourself is legal and is a false economy for most people in year one, because the fines for a late or wrong filing exceed the fee, and because the questions you do not know to ask are the expensive ones.

Beyond that, the running costs are small and predictable: invoicing software if you issue documents regularly, and very little else. Resist the urge to buy tools before you know what the work actually needs.

The first-year mistakes worth avoiding

• Registering at VAT and not at National Insurance. The bill arrives later, with interest.
• Mixing personal and business spending on one card. Every statement becomes a decision, and private items claimed by accident are the easiest thing to find.
• Issuing a tax invoice while exempt. A real problem, not a formatting error.
• Not filing a nil period. Owing nothing does not remove the obligation to report.
• Throwing away receipts under a hundred shekels. They add up to a meaningful deduction, and they are unrecoverable once gone.
• Assuming income tax and VAT are the same conversation. They have different rules, different periods and different documents, and an expense can be deductible for one and blocked for the other.

General information, not tax advice for your situation. Thresholds, rates and filing dates change, so confirm current details with the Tax Authority, Bituach Leumi or your accountant. Next: choosing your VAT status, or which expenses are deductible.