How Are Tax Advance Payments Calculated?

What Are Tax Advance Payments and How Are They Calculated?

Tax advance payments are payments that must be made to the Israeli tax authority during the tax year, based on expected income. Unlike employees who have taxes withheld from their salary, self-employed individuals and businesses do not have taxes withheld upon receiving income — therefore, they must report and pay themselves. Tax advance payments are a way for the tax authority to ensure that a large tax debt does not accumulate by the end of the year.

The calculation of tax advance payments depends on the type of entity (exempt individual, licensed self-employed individual, company) and the income reported in previous years. The basic formula is: Advance Payment = (Expected Annual Income × Applicable Tax Rate) ÷ Number of Payments per Year. However, the tax authority uses different methods for calculation, such as advance payments based on the previous year or self-assessment.

Who Must Pay Tax Advance Payments?

• Licensed self-employed individual — a self-employed individual whose annual income exceeds a certain amount (typically over 100,000 NIS per year) and is required to file periodic VAT reports.
• Exempt individual — a self-employed individual whose income is below the reporting threshold, but may be required to pay advance payments if income exceeds a certain amount.
• Limited liability company — every company must pay corporate tax advance payments quarterly or monthly, depending on the size of income.
• Association — an association that has income from business activities may be required to pay advance payments.

If you are operating in Petach Tikva or Ramat Gan and are unsure whether you are required to pay advance payments, this is a good time to contact a tax accountant who will review your situation in accordance with current regulations.

Tax Advance Payment Calculation Methods — Key Differences

The Israeli Tax Authority uses different methods to calculate advance payments, depending on the type of entity and income. Understanding the method relevant to you is essential for proper budget planning and to avoid overpayment or tax debt at the end of the year.

1. Advance Payments Based on Previous Annual Report

This is the most common method for self-employed individuals. The Tax Authority calculates the advance payment based on income tax and VAT reported in the previous year. The basic formula is: Advance Payment = (Previous Year Tax ÷ 12) × Number of Months in Current Period. If your income increases year-over-year, this payment may be lower than required, so you should be aware of the risk of tax debt at year-end.

2. Self-Assessment of Advance Payments

For authorized self-employed individuals and companies, there is an option to submit a self-assessment of advance payments based on expected income. If you anticipate significant income growth, you can notify the Tax Authority and pay higher advance payments. This requires a self-assessment form and precise calculation of expected income.

3. VAT Advance Payments

An authorized business operator is required to file periodic VAT reports (usually monthly or bi-monthly) and pay advance payments based on the report. The advance payment is calculated as: VAT due on sales minus VAT refunded on purchases = Advance Payment Due. The Tax Authority typically updates the advance payment when filing the periodic report.

4. Company Quarterly and Monthly Advance Payments

A private company is required to pay corporate tax advance payments at regular intervals. Typically, the advance payment is calculated as 25% of expected profit or based on the previous year, divided into four quarterly payments. A company with fluctuating income may request relief based on self-assessment.

Practical Example: Calculating Tax Advance Payments for a Licensed Business Owner

Let's look at a concrete example. Suppose you are a licensed business owner in Ramat Gan, operating a service business, and your income in the previous year was 250,000 NIS. The income tax you calculated (after expenses) was approximately 35,000 NIS. Additionally, you reported VAT of 30,000 NIS (VAT charged minus VAT refunded).

Advance Payment Calculation:

• Estimated annual advance payment = 35,000 NIS (income tax) + 30,000 NIS (VAT) = 65,000 NIS
• Monthly advance payment = 65,000 ÷ 12 ≈ 5,417 NIS
• Bi-monthly advance payment = 65,000 ÷ 6 ≈ 10,833 NIS

If your income in the current year is expected to be 300,000 NIS (a 20% increase), you should be aware that your current advance payment may be insufficient. In this case, you can file a self-assessment with the tax authority and increase the advance payment accordingly.

Year-End: When you file an annual report, the actual tax will be calculated. If the actual tax is 42,000 NIS (due to higher income), and you paid 65,000 NIS in advance payments, you will receive a refund of 23,000 NIS. Conversely, if the actual tax is 68,000 NIS, you will owe an additional payment of 3,000 NIS.

Common Mistakes in Tax Advance Payment Calculation — and How to Avoid Them

An experienced certified accountant knows that there are common pitfalls in calculating advance payments. Here are the mistakes I have frequently encountered:

Mistake 1: Using Outdated Data

If you use an annual report from three years ago, your advance payment may be entirely inaccurate. The Tax Authority uses the most recent annual report filed. Ensure that your data is current and consistent with the approved report.

Mistake 2: Failure to Account for Income Changes

If your income increases or decreases significantly, the advance payment based on the previous year may be inappropriate. For authorized business operators whose income varies, there is an option to request relief on advance payments or self-assessment.

Mistake 3: Failure to Pay on Time

Advance payments must be made on fixed dates set by the Tax Authority. If payment is late, you may be charged interest and penalties. We recommend setting calendar reminders or using a digital service to manage payments.

Mistake 4: Incorrect Calculation of Deductible Expenses

Income tax is calculated based on income minus deductible expenses. If you calculate advance payments based on gross income without expenses, the advance payment will be too high. Consult with an accountant about which expenses are deductible in your business sector.

Mistake 5: Failure to Update After Periodic Reporting

For authorized business operators, the Tax Authority may update the advance payment following periodic VAT reporting. If you did not check the update, you may have paid an incorrect amount. Review any updated report from the Tax Authority when received.

Professional Accounting Support in Tax Advance Payments Calculation — Why Does It Matter?

Calculating tax advance payments is a process that requires precision and up-to-date knowledge of Israeli tax authority laws and procedures. Ben Or Kook Certified Public Accountants specializes in supporting business owners, enterprises, and companies in this field. We help you:

• Calculate accurate advance payments based on actual income and business patterns, while accounting for business changes.
• Plan cash flow so you are prepared for timely payments without financial pressure.
• Avoid costly mistakes such as late payment, miscalculation, or failure to update following periodic reports.
• Use a digital service that is easily accessible — you can track your advance payments at any time.
• Receive personalized advice from a certified public accountant at Ben Or Kook who understands your situation and can offer tailored solutions.

If you are located in Petach Tikva or Ramat Gan and feel confused about tax advance payments, now is the time to contact us. A complimentary initial consultation will help you understand your situation and plan your next steps.