Many people start working independently and earn low amounts at the beginning, which raises the question of whether this is a business in every sense or if the income is still "not significant".
In practice, the moment you earn money as a result of providing a service to clients, you are required to report the income. From the tax authority's perspective, this is a full business activity, and therefore even if the income in the first year is low, it is still considered a business. The only distinction is the type of file you belong to, not the existence of the business itself.
The law does not check how much you earn at the beginning, but rather what the nature of your activity is. If you offer services professionally, repeatedly, and continuously, you are considered a business owner. Therefore, even income of a few hundred shekels per month requires opening an appropriate file. The dilemma is not whether it is considered a business, but how to manage the business correctly from the very first moment.
Why do even low incomes require opening a file?
According to the law, any income generated from a service you provide to clients is defined as business income.
Even if it is an initial activity on a small scale, the fact that you receive payment for a professional service makes the activity a business, and therefore you are obligated to open a file and report as required by law.
The tax authority does not care whether the business is in its initial stages or is still small from an economic perspective. What matters is whether it is a professional activity that has the intention to develop or continue over time. An activity that meets this definition is considered a business and therefore opening a file is an obligation arising from the nature of the activity itself, not from the amount of income.
Who earns little at the beginning usually fits the profile of an exempt business owner?
For many who are in their first year and taking it step by step, an exempt business owner file is the natural path. This file is intended for businesses with a relatively low turnover, and it allows you to work legally and in an organized manner without dealing with VAT collection. It is excellent for freelancers at the beginning who provide services to private clients and maintain low operating expenses.
An exempt business owner is still defined as a full business, with basic management obligations for recording income and issuing receipts. Once a year there is a report on the turnover of income to VAT and filing a report to the income tax authority. In other words, despite the relative simplicity, this is a business owner in every sense and therefore you must follow the various requirements and ensure compliance with legal obligations.
Why is it important to report even if the income is small?
First of all, because it is the law. And we should not get entangled with law enforcement authorities.
Organized reporting from the start prevents future risks. Anyone who starts working without opening a file is considered someone receiving unreported income. In such cases, the tax authority may demand retroactive payments, impose fines, and even subject the business owner to legal proceedings. Beyond the legal aspect, working without a file limits business advancement since you cannot issue official documents or work with business clients.
When you start in an organized manner, the business is built on strong foundations. This ensures legal and financial protection and opens new opportunities such as working with suppliers, providing organized quotes, and the ability to collect payments legally. Even if profits are still low in the first year, reporting is an integral part of proper business conduct.
When is income not considered a business?
It is important to distinguish between income from a professional service and income that is not business-related. Selling personal equipment such as a camera, phone, furniture, or household product is not considered business income and therefore does not require opening a file. Gifts from family or financial assistance are also not part of business income and therefore do not require reporting.
Only when the activity is carried out for the purpose of profit and in a recurring manner does it become a business. If you perform a one-time action that is not part of a professional framework, there is no need to open a file. The distinction between one-time and recurring is the key to understanding the legal obligation.
Worried about bureaucracy? Not sure how to start? With one click with CPA Digital online file opening you can open an exempt business owner file, licensed file, and a private company file.