Once you’ve decided to become an independent, there are several important rules you should know about before commencing your independent activities. Needless to say, it is recommended that you to retain the services of a professional tax advisor at the outset of your activity as an independent. A tax advisor licensed to represent your interests before the tax authorities will accurately handle your application to the authorities, open the relevant accounts for you and accompany your business while following the rules, laws and tax plans relevant for your field of activity.
Opening an Account
VAT – You must open a dealer account with the VAT Office immediately when you begin operating as an independent.
For a beginner independent dealer, there are two types of accounts:
Exempt dealer – up to a transaction ceiling of 79,482 NIS per year, doesn’t pay VAT for income and is not allowed to deduct VAT on expenses.
Licensed dealer – above the transaction ceiling determined for exempt dealers, or with an occupation included in a closed list; must periodically report VAT on income, while deducting VAT on tax-exempt expenses.
Social security – when you begin activity as an independent dealer, you must change your social security status to independent. You must take into account your various income sources (independent, employee, passive income) and define your new status accordingly.
Income tax – when you begin activity as an independent dealer, you must open an account with the Income Tax Authority. When opening your account, you’ll be asked to define your precise field of occupation and whether you employ any employees or sub-contractors.
(Know that access to tax authority records and the opening of tax accounts are available in every registered representative tax advisor office).
Beginning your work
Authorization for withholding tax deduction at source – for certain fields of occupation, every payment realized must be subject to withholding tax deduction at source. Depending on your field of activity, refer to the Income Tax Office and apply for the authorization for withholding tax deduction at source.
Bookkeeping – every field of occupation has its own set of bookkeeping rules. You must find out which of these rules apply to you and follow them completely. Mismanagement or a failure to follow all or some of these rules will result in your books being disqualified!
Printout of internal records (invoices, receipts, etc.) – after opening your account with VAT authorities, and depending on the type of account you open (licensed dealer, exempt dealer), and after finding out whether your field of occupation is included in one of the addenda to the bookkeeping instructions, you must print out your internal records accordingly, and ensure that you are operating in accordance with those rules which apply to you, such as:
VAT – depending on the type of account you open, you’ll be required to report to VAT authorities as follows:
Licensed dealer – according to VAT requirements, will deliver a monthly/bi-monthly report detailing the sum of transactions, VAT for those transactions, and VAT deducted from tax-deductible expenses.
Exempt dealer – will report once yearly of the sum of their transactions. In any given year, should that sum surpass the transaction ceiling for exempt dealers, the dealer will be re-classified as licensed and be subject to standard reporting procedures.
Income tax – at the beginning of every year, you are required to pay an advance on income tax using a report book. This is a monthly/bi-monthly report, according to tax authorities’ requirements.
The sum of the advanced payment is calculated (as noted in the book) as a percentage of your total transactions, not including VAT, for the report period.
You must regularly recalculate this payment based on your profits, and make sure that the percentage factor set for you is in accordance with the tax requirements your are subject to. For that purpose, you may apply with tax authorities for a decrease/annul/increase of your advance payment, during the year itself.
Social security – after changing your status to independent, you’ll be required to state your predicted profits for your first business year.
An advance payment book will be sent to you accordingly. These are fixed monthly payments, based on your declaration of profit.
You are required to periodically recalculate your social security fees based on your profits and apply for a social security payment increase/decrease during the year.
Ending the fiscal year
The fiscal year begins on January 1 and ends on December 31.
Addendum sheets – at the end of the year, you’ll be required to fill out a number of addendum report sheets, as part of your duties detailed in the bookkeeping instructions. These sheets include information needed for compiling your yearly report, such as:
Preparing your yearly report – starting April of the following year, you’ll be required by tax authorities to report your fiscal activity for the year that’s passed.
Needless to say, this report includes your total profits, wages and salaries, passive income, interest, foreign income, spouse’s income, et cetera.
The yearly report must be conducted according to the instructions found on the Income Tax Authority’s rules and regulations on the matter.
Since you probably are not an expert on tax law, it is recommended that you retain the services of a qualified tax advisor who can assist you in filling out your yearly report according to standard rules, legislation and tax laws.
After delivering your yearly report, and based on it, a calculation will be performed to determine the sum still owed to tax authorities, after deducting your finalized advance payments. This procedure is done in the same manner for social security.
Capital statement – once every several years, you’ll be required to deliver a report detailing your entire existing assets and commitments, both business-related and personal, in Israel and abroad.
A capital statement is a tool used by tax authorities in order to assess the capital increase between statements, which will of course be accounted for by your profits in the interim.
Tax audits – You may at any point be called to appear before the tax authorities and present your business’s books and records for an audit or a discussion to be performed by an auditor/inspector.
It is not recommended to arrive without the accompaniment of a registered representative, such as a tax advisor.
For all the stages detailed here, during your activity as an independent, the Tax Advisor Office recommends that you retain the services of a qualified tax advisor who, by the nature of their occupation, is an expert on all tax issues and is a registered representative.
The tax advisor’s duties are to handle your tax files, manage some of the bookkeeping, perform tax planning as permitted by law, deliver current and yearly reports, and of course, represent your interests before the various tax authorities.
A list of tax advisors can be found on the Tax Advisor Office website.
We wish you the best of luck on your way as an independent.
Yaron Gindi, tax advisor – President of the Tax Advisor Office
Eyal Alon, tax advisor – Vice President of the Tax Advisor Office.