First Year as a Self-Employed Professional — Tax and Reporting Checklist

Who Is This Guide For?

If you have opened a business within the past year or are about to do so, this guide is for you. We are discussing first-year self-employed professionals — whether it is photography, graphic design, consulting services, commerce, or any other occupation that does not require a special license.

Reporting and taxes are not optional. The Tax Authority expects you to report your income, pay tax advances and national insurance, and file your annual return on time. All of this may seem complicated at first, but once you know exactly what needs to be done — it is far less stressful.

On this page, you will find all the information needed to start correctly: which business structure to choose, what mandatory reports are required, how to calculate taxes and national insurance, and which mistakes we see every day that you can avoid.

What is an Exempt Business, an Authorized Business, and a Company — and Which One Do You Need?

Before you start reporting, you need to decide what type of business to establish. This is not something you change every year, but it affects taxes, reporting, and VAT reporting.

Exempt Business — this is the simplest type. If your annual income does not exceed a certain amount (usually around 100,000 NIS, but this varies), you are exempt from VAT. This means: you do not report VAT to the tax authority, and you cannot claim refunds for VAT you paid. An annual report for an exempt business is simpler, but still mandatory.

Authorized Business — if your income is higher or you choose to register for VAT, you are an authorized business. Here you report VAT monthly or quarterly (depending on your scope). This is more work, but there is an advantage: you can claim VAT refunds on expenses. For most clients we see with medium-sized businesses, an authorized business is the right choice.

Limited Company — if you plan to grow quickly, or if you have partners, a limited company may be the right choice. However, it also requires more complex annual reports, mandatory audits, and more complicated reporting. In your first year, most self-employed individuals do not need this.

Step-by-Step Checklist — What You Need to Do in Your First Year

Let's go through all the steps you need to take in your first year as a self-employed professional. It may seem like a lot, but once you know exactly what and how much is involved, it manages itself.

1. Establishing a Business (Months 0–1)
   Before you start working, you need to register as a formal business. It's not difficult — you can do this through the Tax Authority website or through a business account at a bank. You need to decide whether you are an exempt business or a licensed business (see previous section). Don't forget: once you open a business, you must also register for national insurance as a self-employed individual. This is not automatic.
2. Opening a Business Bank Account (Month 1)
   A separate business bank account is not a legal requirement, but it is much simpler for your business and for the Tax Authority. All your income and expenses will be in one account, and this will help you with your annual report. Different banks offer business accounts under different terms — compare before you choose.
3. Setting Up a Bookkeeping System (Months 1–2)
   You don't need a CPA firm from day one, but you do need a way to track your income and expenses. This can be a simple Excel spreadsheet, free software, or paid software like Wave or Zoho. What matters: keep every receipt, invoice, and bill. This will be critical for your annual report.
4. Understanding Tax Advances (Months 1–3)
   The Tax Authority doesn't wait until the end of the year to collect taxes. You need to pay tax advances every month or every quarter. The amount depends on your estimated income. In your first year, you usually pay based on an estimate, and at the end of the year you settle the account. Don't ignore this — it's not something you can wait on until the end of the year.
5. National Insurance and Mandatory Deductions (Months 1–3)
   As a self-employed professional, you need to pay national insurance. This is not something an employer pays for you (as in employment) — you pay it yourself. The amount depends on your income. There are also other things that may be mandatory deductions — such as pension (if you've chosen a pension plan) or an education fund. Check with a CPA what exactly applies to you.
6. VAT Reporting (Months 1–12, monthly or quarterly frequency)
   If you are a licensed business, you need to report VAT every month or every quarter. This is not difficult if you track correctly, but if you wait until the end of the year — it will be a headache. If you are an exempt business, you don't report VAT at all.
7. Filing an Annual Report (Months 12–13)
   At the end of the year (usually up to two months after the end of the tax year), you need to file an annual report with the Tax Authority. The report summarizes all your income, expenses, and taxes paid. This is when the Tax Authority checks whether you paid enough tax, or if you're entitled to a refund. Don't do this yourself the first time — this is exactly where mistakes happen.

What You Need to Know About Tax and National Insurance in Your First Year

We see many self-employed individuals in their first year who don't fully understand how taxation works. Let's go over the key points.

Tax Advance Payments — This is not a penalty, it's an expectation
When you register as self-employed, the Tax Authority expects you to pay tax monthly or quarterly. They don't wait until the end of the year. In your first year, you typically pay based on an estimate of your expected income (you tell them: "I expect to earn X annually"). At year-end, when you file your annual tax return, the account is settled: if you overpaid, you receive a refund; if you underpaid, you pay the difference. What's important: don't assume you'll pay everything at year-end. It could be a surprise precisely when you don't need one.

National Insurance — Mandatory and not inexpensive
As a self-employed person, you must pay national insurance contributions yourself. It's not optional. The amount depends on your income, but typically it's a significant monthly sum. There are also important things to know: if your income drops sharply (for example, in your first year you're still starting out), you can apply for a reduction in payments. It's not automatic — you need to request it. Check with our office if you qualify for a reduction.

Permitted Expenses — Don't forget them
As a self-employed person, you can deduct expenses from your income. This includes items such as rent (if you work from home, a portion of the rent), equipment, software, business travel, and raw materials. However, you must keep receipts. The Tax Authority doesn't believe in expenses you can't prove. We see many self-employed individuals who forget to keep receipts and then lose money on their annual tax return.

Annual Tax Return — Not as straightforward as it seems
The annual tax return is not just a list of income and expenses. The Tax Authority wants to see that you know how to calculate taxable income (income minus permitted expenses) and how to apply the correct tax rate. In your first year, you also need to decide whether you're using the cash method or the accrual method. This affects how you report income and expenses. This is not something you need to understand on your own.

Common Mistakes in the First Year — How to Avoid Them

Most new self-employed individuals make similar mistakes. Here are the mistakes we see every day, and how to avoid them:

• Failure to establish a business bank account
  You are using your personal account for your business. This causes confusion in the annual report, and it is difficult for the tax authority to verify whether income is actually from the business or something else. A separate bank account = a clearer report = fewer problems.
• Failure to retain receipts and expenses
  "I will remember that at the end of the year." No, you will not. Save every receipt the moment you spend money. It is easier to update continuously for 12 months than to try to reconstruct expenses in December.
• Cancelling self-employment without filing a final report
  If you stopped working in the middle of the year, you still need to file an annual report for the period you worked. We see self-employed individuals who simply "closed" their business without reporting anything. This can be a problem with the tax authority.
• Misunderstanding of tax advance payments
  "I thought I would pay it all at the end of the year." Tax advance payments are mandatory. If you do not pay them, you may face interest penalties. Check with the tax authority how much you need to pay each month.
• Failure to register for national insurance
  This is just like tax advance payments — it is mandatory. Some new self-employed individuals forget to register, and later discover they are not covered by national insurance in the first year. This is a major problem if something happens to them.
• Calculating expenses without documentation
  "I remember spending 5,000 NIS on equipment." The tax authority does not believe your memory. You need a receipt or invoice. Without documentation, the expense is not permitted.
• No professional consultation on the first report
  The first report is the most critical. It sets the tone with the tax authority. If you make a mistake on the first report, it can affect future audits. This is not the place to try to do it yourself.
• Misunderstanding the difference between exempt self-employed and licensed
  You chose to be a licensed self-employed, but did not report VAT every month. Or vice versa — you chose exempt self-employed status, but tried to claim back VAT. This does not work. Check which type of self-employed status you are and comply with the reporting requirements accordingly.

When Should You Consult an Accountant?

You might think: "I can handle this myself in the first year." Perhaps. But here are the cases where it's really advisable to consult a certified accountant:

You are uncertain which business classification to choose
The choice between a VAT-exempt business and a licensed business affects all your tax filings for years to come. If you are unsure, an accountant can help you understand which business classification is appropriate based on your income and business objectives.

You do not know how to organize your tax filings
If you are unsure how to track income and expenses, or how to report VAT, it is time to seek assistance. Errors in tax filings can be costly.

Your annual tax return is approaching
If you are approaching the annual tax return filing deadline and have not started, it is definitely time to consult an accountant. This is not something you want to do hastily.

You have complex expenses or income from multiple sources
If you work with multiple clients, or if you have expenses where it is unclear whether they are deductible, it is good to check with a professional.

You want to ensure you are paying taxes optimally
This is not exactly "tax savings" (since it depends on circumstances), but an accountant can help you understand if there are steps you can take to avoid overpaying taxes.