Salaried and self-employed at once

Holding a salary and a small business at the same time is one of the most common arrangements in Israel, and one of the most confusing. The two systems, income tax and National Insurance, look at the same person from different directions, and each assumes by default that it sees the whole picture. It does not.

The result is familiar: either too much is withheld through the year and refunded at the end, or too little is withheld and a demand arrives with the annual return. Both are avoidable.

Why it gets tangled

Israeli income tax is progressive and computed on a person's total annual income. An employer, though, withholds from the salary as if that were all you earn. When business income sits alongside, the salary occupies the lower brackets and the business income should start from the bracket above them. Without an adjustment, the tax withheld during the year does not match the tax actually owed.

The same logic applies to credit points. They are granted once a year, and if two payers apply them at the same time, one of them is under-withholding.

What tax coordination actually is

Tax coordination is a request to the assessing officer so that each payer withholds against the right picture. It can be filed online through the Tax Authority personal area, or on Form 116 with the assessing officer.

In practice it is needed in three situations: more than one employer, a salary alongside business income, and additional income such as a pension or taxable rent. Once approved, the employer withholds at the rate set in the coordination instead of the default.

A coordination is valid for one tax year. People who forget to renew it in January find out from the February payslip.

The National Insurance side

National Insurance runs this entirely separately from income tax, so a tax coordination on its own is not enough. The employer withholds contributions from the salary, and in parallel you pay advances as a self-employed person on the business income, at the self-employed contribution rates.

What matters here: there is a monthly income ceiling above which no contributions are due at all. Someone whose salary is already near the ceiling and who also pays advances on a business can end up paying more than required. The fix is a contributions coordination with National Insurance, which offsets what the salary already covered. Overpayments can be reclaimed, but it is better not to make them.

There is a reverse case worth knowing too: where the salary is small and the business is the main income, you are measured against National Insurance's definition of a self-employed worker. Meeting it is what buys work-injury cover and the full set of benefits.

One annual return for both

A self-employed person has to file an annual return, and where there is also a salary it goes into the same return. Form 106 from the employer is the document carrying the salary figures and the tax withheld from them.

The computation merges everything: tax on total income, less whatever was withheld at source, whether from the salary or through advances. What comes out is either a balancing payment or a refund. The full list of what to gather is in the year-end document list.

What about VAT

The business side lives in its own world. Opening the file, the periodic reporting and the invoices are unaffected by a salary existing alongside. An exempt dealer reports turnover once a year; a licensed dealer files the periodic VAT report as usual.

One point that catches out employees who opened a small business: the salary does not count toward turnover for the exempt-dealer ceiling. The ceiling measures business income alone.

Which expenses belong to the business

A deductible expense belongs to the business, not to the person. That sounds obvious until you reach items serving both: the phone, the internet, the computer, the car. For someone salaried who also runs a business, only the business share counts, measured by actual use.

What does not count at all: anything tied to the salaried job. Commuting to the employer, meals there, or a course the employer required are not your business's expenses. Equipment the employer provided cannot be recorded as a business expense either, even if you occasionally use it for the freelance work. The full breakdown by expense type is in the deductible expenses guide.

The mistakes that repeat

The first is skipping tax coordination because "the business income is small". Even modest income lands in a high bracket once it stacks on top of a salary, and the difference arrives as a demand.

The second is filing a tax coordination and forgetting the National Insurance one. Two systems, two requests.

The third is mixing the money. A salary paid into the same account the business runs through turns expense separation into manual work at year-end, and deductible expenses belong to the business alone.

How Slate helps

The business side is kept apart from the salary: invoices, expenses and reports cover the business and only the business. The VAT report and the income summaries come out of the documents issued, and the Open Format file goes to the accountant, who merges the picture with the salary in the annual return.

This is general information, not tax advice. For a specific situation, talk to an accountant or tax adviser.

Common questions

Do I need to open a business file if I already have a salary?

Yes. Business income requires files with VAT, the Tax Authority and National Insurance, regardless of a salary running alongside. The salary does not cover the business side.

What is tax coordination and when is it needed?

A request to the assessing officer so that each payer withholds tax against the full income picture rather than as if it were the only one. Without it, an employer withholds too little or too much, and the gap only surfaces in the annual return.

Do you pay National Insurance twice, on the salary and on the business?

Not twice over, but through two collection tracks. The employer withholds from the salary, and you pay advances as a self-employed person on the business income. There is a monthly income ceiling above which no contributions are due, which is why a contributions coordination is worth filing too.

One annual return or two?

One. The individual annual return covers every source: the salary per Form 106, the business income, and anything else. Tax is computed on the total, and whatever was already withheld is credited to you.

Are my credit points used twice?

No. Credit points are granted once. If more than one payer applies them, tax is under-withheld and the shortfall appears in the annual return. That is exactly what tax coordination prevents.

What if the business income is very small?

The obligations do not disappear. A small business still files an annual return, reports to VAT on its assigned cycle, and pays National Insurance on its income, subject to the set minimum.

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