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16 February 2014

Mikdamot (tax payments on account) and the אישור ניכוי מס במקור

Anyone receiving income from a salary knows that their employer will deduct tax at source, in accordance with the tax and Bituach Leumi laws (see also here). As such, the government gets regular tax revenues from employees; how often depends on the size of the employer.

In a similar fashion, the government asks that advances be made towards your tax liability from your self-employment (or otherwise untaxed) income. These advances are known as mikdamot מקדמות. It is important to note that the mikdamot do not reflect the final taxes due; these will be finalised when you file your annual tax return.

For anyone with a self-employment business, the advances are calculated as a percentage of your monthly or bi-monthly business turnover (i.e. income [excluding VAT] before expenses). This percentage is set based on your previously filed tax returns (i.e. mikdamot for 2014 are currently based on 2012 taxes, but may be adjusted [usually only upwards] once the 2013 return is filed). For a new business, the percentage will be based on statistical tables - using your declared type of business and expected turnover (which you provided when you opened the file).

If both husband and wife have self-employment businesses, the reported income is the joint income for both on a monthly or bi-monthly basis.

If mikdamot are required in a given tax year, you will receive a booklet in order to report the income and pay the tax. This needs to be filed and paid (at the post office) by the 15th of the month following the reporting period. Alternatively, it is possible to report and pay online (here); and doing so will give you a filing extension until 6:30pm on the 19th.

That being said, the tax office has another way in which to collect taxes on an ongoing basis. Under certain conditions, your customer will be required to withhold tax at source on any payments being made to you - even though you are not being paid as an employee. For regular "contractor" income, the rate of tax to be withheld at source is 30%. Of course, this is tax paid, and can - and should - be reclaimed on your tax return.

However, the tax office is empowered to reduce, or even cancel, the requirement to withhold tax from payments to a self-employed person. In order to do this, a request must be sent to the tax office - this on done on this form, or via your accountant.

If a reduction or exemption has been granted, a certificate confirming this should be given to the customer. These can be accessed here. You can then have the certificates email to you. This certificate is known as an אישור ניכוי מס במקור (certificate of deduction of tax at source).

For new businesses, the tax office will typically approve a reduced rate (maybe 3% or 5%), and will be valid for 6 months; after which you will need to renew the certification. For older businesses with a track record of reporting and paying taxes on time, a full exemption should be granted. These are normally extended automatically on 1st January, and are usually valid for 15 months.

If you are required to pay mikdamot, and have had tax deducted from your income in the reporting period, you can offset the tax deducted against your mikdamot due. Furthermore, don't forget to ask the payer to issue you with form 857 at the end of the year, which will summarise the gross payments made and taxes deducted from you during the tax year. You will need this form in order to claim the tax withheld in your tax return.

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