Employment and Self-Employment — How to Handle Taxes?

Who is this guide suitable for?

If you work as an employee and simultaneously manage a exempt business, licensed business, or work as a self-employed professional in a specific field — this guide is for you. Most clients we see in this position initially do not understand how to report dual income, how this affects their total tax, and what deductions they can claim.

Working simultaneously in two fields is now a common phenomenon — someone works for a company and develops their own business in the evenings or on weekends. Or an employee who decided to start side projects. This situation creates tax complexity that, if not handled properly, can lead to incomplete reporting, missed deductions, or even a tax authority audit.

On this page, we will explain exactly how this situation works: which income requires reporting, how it affects your payslip, what your deductions are, and what you need to do to remain compliant with the authorities.

What is Employment as Both an Employee and Self-Employed, and Who Does It Apply To?

Employment as both an employee and self-employed means you have two income sources simultaneously: income from employment (one or more employers) and income from self-employment (exempt business owner, registered business owner, or freelancer).

This applies to several categories:

• Employees who started a side business: Work for a company on a fixed salary, but in evenings or weekends manage their own projects or provide services as self-employed individuals.
• Freelancers with part-time employment: Work on salary at a company to ensure stable income, but also take on self-employed work in their field.
• Business owners who decided to work as employees: Small business owners who joined a company as employees, but retained their business or still receive income from it.
• Those transitioning between statuses within one year: For example, worked as an employee until September and then started a business, or vice versa.

The important point: all income, whether from employment or self-employment, must be reported to the tax authority. There is no "income too small to ignore."

How to Report Dual Income — Step by Step

The process of reporting two sources of income is actually relatively straightforward if you know the proper order. Here's how it works in practice:

1. Salary Reporting: Your employer reports your salary slip to the tax authorities each month. They also deduct income tax, national insurance, and a study fund. You receive a salary slip showing all these deductions. You don't need to do anything at this stage — it's automatic.
2. Self-Employment Income Reporting: You must report all income received from self-employment activities. If you are an exempt businessman, this is done through an annual report. If you are a licensed businessman, there is a periodic report (monthly or quarterly, depending on scope).
3. Filing an Annual Report: At the end of the year, you must file an annual report with the tax authorities that summarizes all your income (from both salary and self-employment). This report calculates your final tax based on both sources of income combined.
4. Calculating Final Tax: The tax authorities calculate your tax on the total of all income. If tax has already been withheld from your salary, they compare and refund you the difference (if you paid too much) or request additional payment (if you paid too little).

What's important to understand: this is not two separate reports — it's one report that summarizes everything. Self-employment income and salary are combined, and tax is calculated on your total combined amount.

What You Need to Know About Income Tax and Reporting

When you have two sources of income, there are several important things to understand:

Higher tax rate: Tax in Israel is progressive, meaning the higher your income, the higher the tax percentage. When you have salary income plus self-employment income, your total income is larger, so your tax rate may be higher than if you had only one source. This doesn't mean you pay tax on every additional dollar at the same rate — it works in brackets.

Different deductions for each income: On your salary, your employer already deducts income tax, national insurance, training fund, and pension contributions. On self-employment income, you can claim various deductions — professional expenses, employee wages (if applicable), equipment depreciation, etc. However, you must document these properly.

Tax advance payments: If your self-employment income is substantial, the tax authority may require you to pay tax advance payments during the year. This means you pay part of your tax monthly or quarterly, rather than in one lump sum at year-end. This helps the tax authority and prevents you from facing a large payment at the end of the year.

National insurance: When you are self-employed, you must participate in national insurance. If you are also an employee, there is a minimum amount you must pay on self-employment income, even if it is small. This is not part of income tax, but a separate obligation worth remembering.

Annual tax return — it is mandatory: In any case, you must file an annual tax return. Even if self-employment income is very small, even if you are a exempt business owner, the return must be filed. Failure to file can result in penalties.

Common Mistakes and How to Avoid Them

Throughout the years we have worked with clients in this position, we have seen several recurring mistakes:

• "I am an employee, so I don't need to report self-employment income":‏ This is a major mistake. Self-employment income must be reported separately. If you fail to report it, the tax authority can discover this during an audit and impose a fine.
• "I am not a registered business owner, so I don't need to file a report":‏ You are required to file an annual report even if you are an exempt business owner (who does not require formal registration). The report is a tax report, not a business registration.
• "I will report at the end of the year, that's fine":‏ If your self-employment income is substantial, you may be required to make tax advance payments during the year. If you fail to make these payments, you may face a penalty for late payment.
• "I do not keep invoices from my self-employment work":‏ Invoices are your evidence for all income and deductions. Without them, the tax authority will not believe you, and you may be required to pay tax on income you failed to properly substantiate.
• "I calculated my own method for allocating expenses":‏ Expenses must be professional and directly related to your business. If you attempt to claim unrelated deductions (for example, a telephone you use 10% for business and 90% for personal use), the tax authority may reject them or impose a fine.
• "I think my tax will be the same as a single employee":‏ It will not. When you have two sources of income, the tax is higher due to progressive taxation. It is important to plan for this in advance.

When Should You Consult with an Accountant?

With dual income, there are several situations where professional consultation truly helps:

When you're just starting out: If you're new to self-employment alongside salaried work, it's good to clarify in advance how it will work in terms of taxes, advance payments, and deductions. This prevents surprises at year's end.

If self-employment income is growing: When self-employment income rises significantly, you may need more sophisticated tax planning. It might be time to open a licensed self-employed business instead of a exempt self-employed business, or to set tax advance payments.

If you're unsure what to deduct: Professional expenses can be complex. If you work from home, what percentage of rent can you deduct? If you bought a computer, how do you calculate depreciation? This is a good place to get advice.

If you changed situations during the year: For example, you worked as an employee until June and then opened a self-employed business. Or vice versa. This creates a complex situation requiring accurate calculation.

If the tax authority contacted you: If you received an audit letter or inquiry from the tax authority, it's definitely time to reach out. Ben Or Kook can help you prepare the correct response.

Comparison Table — Different Scenarios

To help you understand how this works in practice, here is a table comparing several scenarios:

As you can see, each scenario requires different legal requirements. This is precisely why it is important to know exactly what your situation is.