All freelance work performed in Israel must be reported to the Israeli government and is subject to tax. If you own a business, there’s a system in place for generating receipts and reporting your income to the tax authorities. But what if you are an employee that wants to take on a short-term consulting gig? Or a student helping a professor with a research project? What if you’re currently unemployed and have been offered a few weeks of work on a timely project?
One option is to report to the government that you have made a business arrangement called “Iskat Akrai” – a temporary business agreement. This is done directly on the Tax Authority website or by filling out Form 8356 and bringing it in person to the offices of the Tax Authority. You will then receive an official tax receipt which you send to the entity which hired you as a consultant. The payment you receive is liable for Bituach Leumi (Israeli Social Security), income tax and VAT. This option is only available for a one-time payment, so if you provide a service for a few months, you can’t use multiple Iskaot Akrai to be paid each month, and will have to accept payment in one lump sum.
Another option is to ask the entity that hires you to put you on their books as an employee and pay you with a Tlush Maskoret (pay stub), in which taxes and Bituach Leumi are withheld automatically. If you have another job, you will need to notify the Tax Authority, by performing a Teum Mas (tax adjustment) online. In the absence of a Teum Mas, each employer will withhold the highest tax rate. When you report both incomes, the Tax Authority instructs each employer how much tax to withhold.
Not all employers will agree to put you on the books for a short time, due to the extra paperwork involved, so this is not always a possibility.
The third option is to register as an employee of an Employer of Record service. That company will then issue an invoice to the entity hiring you and send them a receipt once payment has been made. This option is easier for the hiring body, but you will still need to fill out a Teum Mas, since you will be considered a person with more than one job.
How do you know which option is best for you? The deciding factor may very well be the employer’s preference, since it has to be worth their while to hire you. You want to make it easy for them to pay you, otherwise they might choose to hire a different consultant, who already has a registered business. If you are able to choose, consider whether you expect to receive more than one payment and whether you prefer the bureaucracy involved with an Iskat Akrai or with a Teum Mas.
Remember that a one-time consulting gig may very well turn into something more long-term or give you a taste for freelancing that you want to pursue. If that happens, you may find yourself opening a business after all.