Opening a file with the Income Tax Authority is one of the first steps that anyone starting to work as a self-employed person needs to understand thoroughly.
There are those who start providing services or selling products, all without knowing whether they are required to open a file, and many others are afraid of bureaucracy and therefore delay the process assuming it can be done at a later stage.
In practice, the rule is simple: the moment you start earning money from an activity that has a business nature, you must open a file.
In the case in question, it is likely that you are suitable for opening an exempt business file; which is appropriate for those who earn up to 122,833 ₪ per year.
The difference between business activity and private action is the key
Not every sale or payment requires opening a file, but once you offer services, earn from them, and intend to do so repeatedly, the tax authority sees this activity as a business. Therefore, it is important to know the boundaries and understand in advance whether you fall within the framework of a business operator who needs to report, or whether you are still within the framework of purely private income that does not require opening a file.
When are you required to open an Income Tax file?
Opening an Income Tax file is required the moment you start working as a self-employed person and generate income from services or products.
Even if it is a very small business or initial income, the law requires you to open a file regardless of the amount of income.
This means that even if you have only one client who pays you regularly, or you offer an occasional service that repeats itself, from the tax authority's perspective it is a business. Once the activity is ongoing, you are required to open a file and start reporting as required by law.
The requirement to open a file also applies when it comes to side work alongside employment as an employee. If you are an employee who starts providing freelance services in parallel, even if it is relatively low income, you must open a file as a self-employed person. In addition, you must perform tax coordination to ensure that tax rates are calculated correctly. The obligation does not change based on the amount of income but based on the mere existence of business activity.
When are you not required to open an Income Tax file?
There are situations where there is no need to open an Income Tax file at all, because the income is not considered business income:
Sale of second-hand items
The most common case is the sale of second-hand personal items. If you sell an old phone, a table, a bed, or any other personal equipment, this is not business income and therefore you are not required to report or open a file.
As long as the sales are occasional and relate to personal property, this does not fall under the definition of a business operator.
Receiving gifts
Receiving gifts or monetary transfers from family members is also not considered business income. If you receive financial assistance from a family member, an inheritance, or a one-time gift, this is not a business and therefore there is no need to open an Income Tax file. Additionally, anyone who works only as an employee and does not generate any business income is not required to open a file at all.
Why is it impossible to work without opening an Income Tax file (and other files with the authorities)?
Let's be clear: it is legally impossible to work without opening files with the tax authorities, and this can lead to significant problems.
Any income received as part of business activity that is not reported is considered illegal income. This means that if you are caught, you may have to pay fines, interest, and retroactive tax charges. Additionally, using improper invoices or working without an invoice creates unnecessary legal exposure.
Beyond that, working without a file limits you from a business perspective. Business clients will not pay you without an invoice, suppliers will not work with you, and you will not be able to submit quotes or receive organized payments. National insurance may also see this as an attempt to avoid proper contributions, which could harm your rights in the future. Ultimately, opening a file is not just an obligation but also a protection for you.
How do you know for sure if you need a file?
The simplest way to understand if you fall under the definition of a business operator is to check whether you are offering a service or product in exchange for payment on a recurring basis.
If you intend to earn money from a certain activity and perform it multiple times, this is business activity in every sense and therefore you must open a file. Even if the activity starts on a very small scale, it is still a business from the tax authority's perspective.
If it is a completely one-time activity or sale of personal equipment, there is no need to open a file. The tax authority's position is clear in such situations and there is no concern about breaking the law. However, many make mistakes in identifying the boundary between one-time and recurring business, so it is recommended to ask and verify, especially if there is doubt.
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