Tax Advances — How to Calculate and When to Pay?

If you are self-employed or own a business, tax advances are something that will land on your desk at least twice a year. This is not something you pay when your tax return arrives at the end of the year — this is something the tax authorities expect from you during the year itself.

The point is simple: if you are earning income, the government wants a portion of it now, not next year. Tax advances are exactly that — payments you make each year, based on your estimated income, so you don't have to pay a huge amount all at once at the end of the year.

Most clients we see in initial meetings don't quite understand the mechanics behind calculating tax advances. They know they have to pay, but the questions keep coming back: exactly how much? When? What if my income is lower this year? If I earned more? This guide helps you understand all of this, step by step.

What Are Tax Advances and Who Does It Apply To?

Tax advances are payments you make to the tax authorities during the year, based on your estimated income. The idea is that you won't have to pay all the tax in the last minute of the year, but rather pay gradually.

Who needs to pay tax advances? Essentially, anyone who has self-employment income or business income. This includes:

• Self-employed individuals — from a self-employed person who opened a business in January to someone already in business for years.
• Exempt and licensed business owners — if you operate a business, you likely pay advances.
• Limited company owners — the company itself pays corporate tax advances.
• Employees with additional income — if you have a regular job and additionally self-employment income (for example, freelance work), you may be obligated to pay advances on the self-employment income.

If you are an exempt business owner with very low income, you may be exempt from paying advances, but this depends on circumstances. One point that is not always clear: if you are new to business, the tax authorities may still require advances based on their assessment, even if you don't yet know exactly what your income will be.

How Tax Advance Payments Work — Step by Step

Let's walk through the process from beginning to end, so you understand exactly what happens and when.

1. The Tax Authority estimates your income — typically, the authority looks at your income from previous years. If this is your first year, they use their own estimate (or the estimate you submit). They estimate how much money you are expected to earn in the coming year.
2. The authority calculates the theoretical tax — based on this estimate, they calculate how much tax you need to pay on this income. This includes income tax at the applicable rate, minus any deductions you are entitled to.
3. The advance payments are divided into installments — the annual tax amount is typically divided into two advance payments (in certain months of the year). Each payment must reach the Tax Authority by a specific date.
4. You pay on the scheduled dates — the authority sends you a notice (or you can view it in your portal) with the dates and payment methods. You pay via bank transfer, credit card, or government portal.
5. At the end of the year, you submit an annual report — here your actual income is determined. If you overpaid in advance payments, you receive a refund. If you underpaid, you pay the difference.

That's the idea in brief. But let's dive a bit deeper into the calculation itself, as this is where people usually get confused.

What You Need to Know About Tax Advance Payments Calculation and Reporting

When the tax authority calculates advance payments, they typically use a standard income tax rate. The rate depends on the size of your income — if you earn more, you pay a higher percentage. This is not something you choose; it is fixed by law.

However, there is something important: the authority may assess your income in advance. If you are convinced that your income will be significantly lower than their assessment, you can request a reduction in advance payments. This is not automatic — you need to support your request with data (maintenance, expected expenses, etc.).

Additionally, if you are a licensed business owner, you also pay VAT (value-added tax) in addition to income tax advance payments. These are two completely different things. VAT is a periodic report (usually every two months or monthly), while income tax advance payments are something annual.

Another point: if you operate as a private company (Ltd.), the company itself pays corporate income tax advance payments. These are not advance payments on your personal income, but rather on the company's profit. If you distribute dividends from the company, you may pay additional tax on that — but that is a separate matter.

Real-World Examples — Different Scenarios

Scenario 1: Self-Employed Individual with Relatively Stable Income

Dan is a freelance graphic designer. Last year he earned 150,000 shekels. This year, he is expected to earn approximately the same amount. The tax authority estimates his income at 150,000 shekels and calculates advance payments accordingly. Dan pays two advance payments during the year. At the end of the year, he files an annual report. If he actually earned 150,000 shekels, he is in compliance — he owes nothing and receives no refund.

Scenario 2: Self-Employed Individual with Increased Income

Rotem is a consultant. Last year he earned 120,000 shekels. This year, he received a major project and is expected to earn 220,000 shekels. The tax authority, based on last year, estimates his income at 120,000 shekels. However, Rotem knows this is incorrect. He can file a request to increase his advance payments based on his new circumstances. If he does not do so, he may pay advance payments that are too low, and at the end of the year will need to pay a significant balance.

Scenario 3: New Business Owner

Ari opened a business in January. He had no income last year (or he was employed on a salary). The tax authority does not know exactly what his income will be. They may use their own estimate or require him to submit his own estimate. Ari needs to be careful here — if he estimates too low, he may face problems later.

Scenario 4: Salaried Employee with Additional Self-Employment Income

Yael works as a manager at a company (fixed salary) and also translates in her spare time. Her translation income is approximately 40,000 shekels per year. On her salary, the employer deducts tax from her paycheck each month. However, on her translation income, she must pay advance payments. She may need to file an annual report at the end of the year to reconcile all taxes.

Common Mistakes and How to Avoid Them

• "I didn't pay advance tax installments because I thought my income was low" — This is not justified. If you are obligated to pay advance installments and you don't, the tax authority may impose fines and interest on you. If you believe your income is low enough to be exempt, request this in writing. Do not rely on assumptions.
• "I paid advance installments based on an incorrect assessment" — If the tax authority mistakenly assessed your income and you are aware of this, file a request for correction. Do not wait until the end of the year. The sooner you correct it, the fewer headaches later.
• "I thought advance tax installments and national insurance were the same thing" — They are not. Advance income tax installments are separate from national insurance contributions. A self-employed person must pay both. If you are self-employed, you pay national insurance monthly (or in various installments), and advance installments are separate payments.
• "I didn't keep receipts and expenses, so I cannot prove my income" — This is a secondary problem. If you cannot prove expenses, you cannot deduct them on your annual report. This means you pay tax on a higher amount. Keep receipts from the very beginning.
• "I think advance tax installments are a percentage of my income, always" — This is incorrect. Advance installments are calculated based on the income tax rate, which depends on the size of your income. If your income increases significantly, you need to update your installments.

When Should You Consult with an Accountant?

If you are just starting out as a self-employed person or business owner, this is exactly the right time to get professional assistance. Here are some signs that you need consultation:

• You are unsure whether you are obligated to pay advance tax payments — this is a basic question, and an incorrect answer could cost you a lot of money.
• Your income varies from year to year — if you don't know how to adjust your advance payments when your income changes, this is where mistakes happen.
• You are a company owner or licensed business operator — the complexity increases here. There are additional reports, and more things can go wrong.
• You miss a payment deadline — if this has happened, you need to know what your next steps are. There are ways to deal with this, but it requires planning.
• You have received a notice from the tax authority that you don't understand — this is a clear sign that you need help. Don't ignore notices from the authority.

In an initial consultation meeting, we typically review your situation, understand your income and reports, and we can tell you exactly what you need to do to remain compliant with the law. If you are in Petach Tikva, Ramat Gan, or in the central area, we are here to help.