Starting a business in Israel? In addition to figuring out product, marketing and revenue streams, you have to decide how you will pay yourself a salary.
There are a number of ways that you can structure your business and get paid.
Chevra B’Am
One option is to create a Chevra B’Am (registered company). This option allows you to hire as many people as you like, including you. You will be an employee of the company and draw a salary with a pay stub just like any other employee. This structure allows your business to scale easily, but it does raise the price of your accounting fees, so it’s generally recommended only if you plan to expand and bring in a large revenue.
When you open a Chevra B’Am you enjoy full autonomy and some flexibility with expenses. The main advantage, though, is the potential for long term gains if you don’t pay yourself all of the company’s earnings as a salary. Funds that remain in the company account are taxed at a lower corporate rate and can be used for investment purposes.
However, these advantages may be offset by the difficulty of dealing with Israeli agencies. You may be familiar with the process of opening a company in the US, which can be done inexpensively online. But Israeli companies are more complex to open and maintain. You need to understand all the rules and take responsibility for the company, in order to ensure you are getting the full value. It’s crucial that you have a trustworthy accountant who is proactive and ensures that all your forms and reports are filed in a timely manner.
Opening a Chevra B’Am is sometimes mentioned as a way to avoid paying US Social Security (if you’re an American citizen), but again, it only makes sense if the company is successful enough to offset the higher accounting fees.
Please note that although we have covered some basic information here, you need to consult with an accountant before making a decision about opening a Chevra B’Am.
Osek Patur or Murshe
You can register as a freelance business, which is called Patur (VAT-exempt) for up to 120,000 (as of 2024) NIS annual revenue and Murshe (not exempt from VAT) for a higher profit. In this scenario, you’re not paying yourself a salary in the classic sense. You collect money from each client and whatever is left over after you pay income tax, Bituach Leumi, VAT, health tax etc. is your income.
This method generally incurs accounting fees (unless you’re really really savvy), but they are much lower than that of a Chevra B’Am. You are responsible for invoicing, collecting and reporting your income to the government. If you are a US citizen, the American government requires you to pay 15% of your income to Social Security.
EOR employee
A method that has become popular in recent years is signing up as an employee of an Employer of Record service. You are a regular Israeli employee with a Tlush Maskoret (pay stub) and all necessary payments withheld before you receive your salary. This method is the best solution if you have one client abroad and need to pay yourself a salary in Israel. If you have multiple clients/customers, it might be expensive to work through an EOR, so you need to check whether this is worthwhile for you.
An EOR service takes care of invoicing and collecting payment and there is no need to report your income to the Israeli government, since your Tlush Maskoret takes care of that. There’s also no need to pay US Social Security.
Choosing the right method
It will probably not surprise you to hear that there’s no right answer for everyone and that you should get professional expert advice before deciding how to structure your business. Your current income, projected income and personality can all play a part in determining which of these methods you should choose for maximum profit and minimum headache.
At Route 38, we offer one-time consultations in which we help you weigh your options and advise you on the best way to proceed. Although we are an EOR service, we promise not to push you into choosing that method or into working with us if that’s not what’s best for you. Our mission is to assist you in making a living in Israel, so you and your family can enjoy a successful aliyah. Email us at info@route38.co.il to book a consultation and take the next step in setting up your business.