Form 135 — What is it and when should you file?

What is Form 135 and who is it relevant for?

Form 135 is an annual report that is filed with the Tax Authority at the end of the year. Essentially, it is the form in which you report all income you received, your lawful deductions, and the calculation of tax owed to you. If you paid more tax during the year, Form 135 is what will help you obtain a refund. If you underpaid—it will tell you how much more you owe.

This form is mandatory for those who work as self-employed (exempt businesses or registered businesses), those who receive income outside of employment, and those with foreign-source income. An employee who received additional income during the year must also report it on Form 135. Limited liability companies file their own annual report, but owners of micro-enterprises or certain organizations may need to file it as well.

The most important point? Form 135 is not optional—it is a legal obligation. Those who fail to file on time risk penalties, interest, and a Tax Authority audit. In short, it is not something to forget about.

How Form 135 Filing Works — Step by Step

The process of filing Form 135 may seem complicated at first, but if you stay organized, it is actually quite straightforward. Here are the steps:

1. Gather all relevant documents: Pay stubs (if you worked as an employee), invoices and expenses (if you are self-employed), bank statements, VAT reports, foreign income, bank interest, and any other income you received during the year.
2. Check the tax deductions already made: Review your final pay stub (if you are an employee) or VAT reports (if you are self-employed) to see how much tax has already been paid to the tax authorities.
3. Calculate total income: Sum all your annual income — salary, self-employment income, foreign income, dividends, and any other source.
4. Deduct legal deductions: If you are self-employed, deduct legitimate business expenses (rent, equipment, utilities, etc.). If you are an employee, you typically cannot deduct personal expenses, but there are exceptions (for example, certain professional expenses).
5. Calculate final tax: Based on your annual income minus deductions, calculate the tax you owe according to the applicable tax brackets.
6. Compare with what was already paid: Check whether the tax already withheld from your salary or paid as advance payments exceeds your final tax liability. If yes, you are entitled to a tax refund. If not, you owe an additional payment.
7. File the form: You can file through the tax authority website (login with ID and digital passport) or through your accountant. If you are self-employed with high or complex income, it is advisable to work with an accountant.

Most clients we work with do not think they need help until they try to do it themselves and realize they have 15 different documents and are unsure which ones are relevant. This is exactly where professional guidance saves time and prevents errors.

What You Need to Know About Taxation and Reporting on Form 135

When discussing Form 135, there are several taxation principles that are important to understand in order to avoid complications. First, the Israeli Tax Authority determines the tax rate in accordance with your income. It is not flat — the higher your income, the higher the tax percentage (progressive tax rates). This means that if you are self-employed with high income, your tax liability will be substantial.

Second: if you are self-employed, you are generally required to pay advance tax payments each quarter. If you did not pay advance payments or paid too little, you may owe a tax debt on Form 135. If you paid too much, you will receive a refund. This point is not always clear to new self-employed individuals — they think they can simply pay everything at the end of the year, but that is not the case.

Third, if you are an employee and have additional income (for example, freelance work on the side), you are obligated to report this on Form 135. The Tax Authority learns about this from employer reports or your VAT statements. If you fail to report it, it will not only result in a penalty — it could lead to an audit of all your income.

Fourth, if you have foreign source income, reporting on Form 135 is mandatory. If you are an Israeli resident and received foreign source income, it is considered income in Israel and you must report it. This is a topic that raises many questions — people do not always know that they must report money received abroad, but that is precisely what is required.

Common Mistakes and How to Avoid Them

In our work with self-employed individuals and employees, we see recurring mistakes that can be costly. Here are the most common pitfalls:

• Failure to report small income: Self-employed individuals think that income of 500 shekels from a one-time job is not important. Wrong. The Tax Authority is interested in all income, even small amounts. If you don't report it and it appears in your bank account, that's a problem.
• Deductions not supported by documentation: Self-employed individuals claim expenses without receipts. That doesn't work. The Tax Authority requires documentation — an invoice, receipt, or bank confirmation. If you cannot prove the expense, it cannot be deducted from your income.
• Failure to report tax advance payments sent: Some companies send reports to the Tax Authority about advance payments they made on your behalf. If you don't enter this in Form 135, you may appear to have paid less than you actually did.
• Discrepancies between VAT and Form 135: If you report VAT, the income reported in your VAT return must match the income in Form 135. If there is a difference, the Tax Authority will ask questions.
• Missing or delayed documents: If you are waiting for a final salary slip or final VAT report, you may file Form 135 with inaccurate data. This requires correction later, which is embarrassing and time-consuming.
• Errors in tax calculation: Many people calculate their taxes themselves and make mistakes in rates or deductions. A simple tax calculator can help, but if you are in doubt, it is better to verify with a professional.

When Should You Consult an Accountant?

Not everyone needs an accountant to file Form 135. If you are an employee with simple income from only a salary slip, you can usually file on your own. However, there are situations where things become complicated very quickly.

If you are self-employed with variable income, complex expenses, or more than one business, this already requires serious organization. If you opened a business last year and this is your first year, there are many questions about how to report this on Form 135. If you have foreign income, foreign property, or a business abroad, this is actually complicated — you need to understand the implications of international taxation.

Limited companies always need an accountant. Associations need one as well, subject to regulations. If you recently opened a business and this is your first year, now is the right time to get help from an accountant who will ensure you are starting correctly.

Another sign that you should call an accountant: if you are unsure whether you need to file Form 135 at all. Not all income requires filing, and it depends on the amount and type. If you are in doubt, it is better to clarify with a professional than to file something you do not need to or to omit something you do.

Practical Tips for Smooth Form 135 Submission

If you are planning to submit the form yourself, here are some things that will help you:

Start Early: Do not wait until the last month before the deadline. When you start consistently, you have time to collect documents without rushing. People who wait until the last minute usually find missing documents and things that have not been updated.

Keep Files Organized: If you are self-employed, keep a digital folder with all invoices, expenses, and reports. If you are an employee, keep all pay stubs. When it comes to Form 135, this is a huge time saver.

Check Israel Tax Authority Reports: If you have an account with the Tax Authority, log in and see if you have an advance payments report or other reports already submitted in your name. This helps you know what they already have.

Use Digital Tools: The Tax Authority offers a digital form with step-by-step instructions. This can help if you are just starting. However, it is not a substitute for professional advice if you are unsure.