In 2013, I changed my business to be part of a company rather than an atzma’i.
What I want to do in this blog post is to explain the advantages and disadvantages of doing this as well as the differences.
I am NOT an accountant, so please do take your own advice, but hopefully this post will give you an idea of what questions you should be asking.
As a sidenote, as an American there will be different considerations. The difference being that you will have to pay National Insurance also in America as a freelancer which can make some fairly large differences to your take home.
(I am not an American!)
In simple terms, as an atzmai, you can be osek patur or osek murasha. If you are osek patur, then you don’t charge VAT (Ma’am), but you also aren’t able to claim back VAT from purchases. The way to decide is whether you earn a certain amount of gross income per year. It is around 100,000nis.
If you earn over this amount and are an atzmai, then you will need to charge any Israeli company or person VAT for your services (currently 17%).
When you make a purchase for your business, you will be able to claim back 17% of the purchase price of anything that you buy in Israel where you are charged VAT – almost all purchases with a few exceptions.
As an atzmai, the taxes that you pay (apart from VAT) are bituach leumi (national insurance) and mas (income tax). These are both calculated by your net income according to your tax return of a fiscal year (1st January-31st December).
Every month (or two depending on your income level), you will pay a certain percentage of your gross income as tax in form of mikdamot (advanced payments) as well as National Insurance. You are told the amounts to pay by calculations done by the tax office based on previous years.
In my experience, these have been between 7-17% of my gross income, although they will depend vastly on your business.
For example, if you are selling 20m NIS a year, but only making 1% profit, then it would be crippling to be paying 7% when in reality, you should be paying less than 1/2%.
Once again, you will not lose or gain by underpaying or overpaying as you will need to pay or receive the balance when your end of the year tax return is filed by your accountant.
However, a word of warning…
As tempting as it is, you don’t want to underpay.
What this will mean, is that once you do a tax return, you will owe the government money and you will NOT have a choice whether to pay them or not. It’s an awful situation to be in as you will need to either find the money somewhere – likely that you don’t still have – or set out a payment schedule with them that means that you will have to pay it off over months or years.
On the other side, you don’t really want to overpay either as it means that you are spending money which you may not have. However, ultimately you will get this money back.
You will pay or receive interest depending on whether you over or underpay and it is at a higher rate than a bank.
However, for your sanity and also knowing where you stand financially, you want the percentage to be as accurate as possible both with your income tax and with your national insurance. If necessary, you can change the amounts that you pay if you predict that they are too high or too low.
As a company, things work slightly differently but make use of the same concepts.
As an owner of a company, you have a few ways of getting money out of the company into your personal bank account.
The first is by paying dividends and the second is by paying yourself a salary.
If you are paying yourself a salary, then you are treated more or less as a normal employee for tax and national insurance purposes.
If you pay yourself a dividend, then you will pay a percentage of that dividend payment as tax to the company.
The trick is, to balance your payments so that you have the correct combination of dividend payments and salary so that you can minimise the tax that you pay.
The difference really comes with the bituach leumi payment. There is a limit in the maximum amount of bituach leumi that you will need to pay however much you earn.
(It gets a bit complicated, but try and follow me on this one…)
For this example, let’s say that the maximum anyone in the country will have to pay is 5,000nis a month (60,000) shekels a year.
As Bituach Leumi at the higher level is approximately 10% of your pay, this means that after you earn 50,000nis a month you are not increasing your payment in terms of bituach leumi.
That is great. However Bituach Leumi sometimes changes the limit.
For example, in recent years they doubled the maximum to about 10,000nis a month.
At one point in the past, they actually took away the limit entirely.
What this meant, was that at the higher salary level employees would be paying an unlimited amount of bituach leumi and their take-home pay would be lower.
So, if you are at the higher salary level, one way of avoiding paying so much bituach leumi would be to be paid as a company and then you would not be paying as much as a salary but take out the additional money as a dividend.
As an aside, there is nothing illegal about doing this. There is a concept in Israeli law that you are actually allowed to minimise your tax payments as long as you keep within the law.
In summary, from a tax point of view you want to calculate if it would be cheaper to pay tax as an atzmai (income tax+bituach leumi) or as a company (income tax + bituach or dividends/income/corporation tax).
The calculations are not so simple and you would need to see an accountant to do the maths, but as a rule of thumb if you are earning above 60,000nis a month as an atzma’i then it might be worth doing.
However, it is not all rosie on the other side… 😉
A big disadvantage is that you need to pay a bookkeeper to do your accounts. This make be anywhere between 1,000nis to 5,000nis plus a month depending on the complexity and volume of your business. This can really eat into any savings that you make.
So, let’s briefly look at the advantages/disadvantages:
1. Extra costs involved such as bookkeeper, company registration (about 1,200nis a year) and accounting fees. You will also need to pay a lawyer to set it up (approx 1,000nis?)
2. You will need to have an annual audit by your accountant leading to increased fees.
3. You have to have a dedicated bank account to your business. A company account in a bank also has increased fees. And generally NOT an overdraft.
4. With a company, you need to do double-entry bookkeeping. As mentioned above, you will generally pay someone else to do this so you don’t need to technically know what this is. However, in practice what this means is that your accounts need to balance. ie. you need to note every single penny that comes in or out. Hard to explain why that is hard, but what it means is that if you take money out of the company then that needs to be accounted for.
5. I only discovered this was recently, but if you are a company then you are unable to take another person or company to small claims court meaning that any legal fees will be far higher.
1. If you are sued, then you are not sued personally unless it can be proven that it is you personally who was liable. That means, that the total amount that you can be sued for is to the limit of your company’s assets.
If you were sued personally then in theory, you may need to sell all of your personal assets also. Therefore operating through a limited company does give yourself a certain amount of protection legally.
2. You have more control over taxes as explained above. Also, you are able to carry over losses to the next year to reduce your tax expenditure in the future. I am not 100% sure that this isn’t the case with atzmai also…
3. You are building an asset. What this means is, that if you do decide to sell in the future, then it is much more concrete what you are selling and means that the buyer knows what they are buying.
4. It looks more professional to have a company rather than being an individual.
5. There are certain government tenders that you can only apply for if you are a company.
Apart from the above, whether you work as an atzma’i or a company it is very similar. You can employ people with both. You can do work for people as both. Expenses that you can claim for are also very similar.
I hope that I have given a pretty good overview, but as always speak to an accountant before taking any steps.
As pointed out by DZ:
There are certain professions where you cannot be an Osek Patur, irrespective of how much you earn, e.g. lawyers, accountants, architects, insurance agents, doctors ….
For the full list see here (in Hebrew) http://www.keren-cpa.co.il/?page_id=796