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Freelancer Tax Compliance in Israel: A 2026 Guide to Staying Legal

Freelancer Tax Compliance in Israel 2026

TL;DR:

Freelancing in Israel requires mandatory tax and social security compliance for every payment received. Your main options are registering as a sole proprietor (Osek Patur עוסק פטור or Osek Murshe עוסק מורשה ) or using a third-party service to become a legal employee, securing full benefits like pension and severance pay. This guide breaks down the pros and cons of each path to help you make an informed decision.

 

Freelancer Tax Compliance in Israel in 2026

Working as a freelancer in Israel offers incredible flexibility and independence, but it also comes with significant legal and financial responsibilities. Many new and established freelancers are unaware that every payment for services must be documented and reported to the Israeli Tax Authority, National Insurance (Bituach Leumi ביטוח לאומי), and VAT authorities . This applies whether you are a full-time freelancer, an employee with a side hustle, or doing occasional consulting work.
This guide provides a comprehensive overview of freelancer tax compliance in Israel, fact-checking common misconceptions and outlining the paths to working legally in 2025.

 

The Legal Reality: Every Shekel Must Be Reported

Israeli law is unequivocal: any income earned from services rendered must be properly documented. This means the website you built for a friend’s startup, the consulting session you provided last month, or the handmade crafts you sold online all require formal invoicing and reporting . The law does not distinguish between full-time freelancing and occasional gig work; if money changes hands for your services, it must be handled correctly.

 

Your Three Paths for Freelancer Compliance in Israel

When it comes to legal freelancer compliance in Israel, you have three primary options, each with distinct advantages and disadvantages.

 

1. Register as a Sole Proprietor (Atzmai עצמאי)
This is the traditional route, where you register your business directly with the tax authorities. You will need to choose between two main statuses:
Osek Patur (Exempt Entity): This is for small businesses with an annual turnover below NIS 120,000 (as of 2025) . You are exempt from charging VAT, which simplifies invoicing and reporting. However, certain professions, such as lawyers, doctors, architects, and consultants, are not eligible for this status regardless of their income .
Osek Murshe (Authorized Entity): If your annual turnover exceeds the Osek Patur threshold, or if your profession is excluded from it, you must register as an Osek Murshe. This status requires you to charge an 18% VAT on all invoices and file regular VAT returns .
Feature
Osek Patur
Osek Murshe
Annual Turnover
Up to NIS 120,000
No limit
VAT
Exempt
18% (must charge and report)
Bookkeeping
Simplified
Full double-entry
Best For
Small-scale freelancers, side hustles
Established freelancers, specific professions
 
Responsibilities of a Sole Proprietor:
As a sole proprietor, you must register with the Tax Authority, VAT office, and Bituach Leumi. You will be responsible for managing all bookkeeping, financial reporting, and annual tax returns (Form 1301). Additionally, you must make mandatory monthly or quarterly advance payments for tax and National Insurance. Since 2017, all self-employed individuals must make mandatory pension contributions . While this path offers complete control, it involves significant administrative complexity, often requiring the help of an accountant.

 

2. The Hybrid Model: Atzmai Sachir (Self-Employed Employee)
The term “Atzmai Sachir” (עצמאי שכיר) is often used to describe a hybrid model where a freelancer uses a third-party service to handle their invoicing and compliance. While you receive a payslip (tlush sachar), it is crucial to understand that you are still legally considered self-employed by the tax authorities . These services simplify the administrative burden but do not convert your status to that of a legal employee, meaning you do not receive benefits like severance pay (Pitzuim) or employer pension contributions.

 

3. Become a Legal Employee Through an Employer of Record (EOR)
This option is fundamentally different from the others. By partnering with an Employer of Record (EOR) service, such as CWS Freelancer Shield, you are converted into a legal employee of that service. The EOR acts as your official employer, handling all compliance while you maintain your freelance independence.
How it Works:
You find clients and agree on your rates as usual. The EOR service invoices your clients on your behalf, including VAT. The EOR processes the payment, deducts taxes, National Insurance, and pension contributions at the source, just like a regular employer. You receive a monthly payslip (tlush) and an annual Form 106 for simplified tax filing.
 
Key Advantages of Employee Status:
Full Social Benefits: You receive all the protections of a salaried employee, including employer pension contributions, accumulating severance pay (pitzuim), and comprehensive National Insurance coverage.
Simplicity: You avoid the complexities of running a business, such as bookkeeping, VAT reporting, and dealing with the tax authorities.
Financial Security: The mandatory, dual-contribution pension and severance pay create a robust financial safety net for the future.
This model is particularly beneficial for full-time freelancers who value security, employees with side gigs who want to avoid opening a business file, and new immigrants (Olim Hadashim עולים חדשים) navigating the Israeli bureaucracy for the first time.

 

Key Financial Differences: Self-Employed vs. Employee

Understanding the financial nuances is critical for effective freelancer compliance in Israel.
Benefit
Sole Proprietor (Atzmai)
Legal Employee (via EOR)
Pension
Mandatory contributions made entirely by you.
Both employee and employer portions are contributed, significantly boosting savings.
Severance Pay (Pitzuim)
Not applicable. You do not accumulate severance rights.
Yes, accumulates with every payment, creating a substantial long-term saving.
National Insurance (Bituach Leumi)
You pay the full self-employed rate. You can claim a 52% tax deduction on these payments .
Paid at the employee rate, with the employer contributing their portion.
Keren Hishtalmut
You can contribute up to a tax-deductible ceiling of NIS 20,520 (2025) .
Employer may contribute (tax-free up to a certain limit).
Unemployment Benefits
Not eligible.
Eligible for unemployment benefits if you lose work.
Taxes
You can deduct business expenses to lower your taxable income. The Osek Zair status allows a 30% automatic deduction for those earning under NIS 120,000 .
Taxes are withheld at the source based on your salary. No business expense deductions.
 

Understanding the Osek Zair Status

The Osek Zair is a tax status (not a business registration) introduced in 2024 that applies to self-employed individuals with annual turnover under NIS 120,000. It provides significant tax relief by allowing a 30% automatic deduction on your income without requiring receipts for business expenses . This means you only pay income tax on 70% of your revenue, simplifying your tax filing considerably. The Osek Zair status is available to both Osek Patur and Osek Murshe registrations, making it an attractive option for small-scale freelancers.

 

VAT Considerations for Freelancers

One critical aspect that trips up many new freelancers is VAT (Value Added Tax). When you are registered as an Osek Murshe or use an EOR service, you must add 18% VAT to your client invoices . The best practice is to quote your price and then add VAT on top. For example, if your fee is NIS 10,000, the invoice should be for NIS 11,800. If you fail to add VAT to your quote, the VAT will be deducted from your net earnings, effectively reducing your take-home amount.

 

Choosing the Right Path for Your Situation

Deciding which path to take depends on several factors:
Monthly income level: Higher earners may find sole proprietorship more cost-effective, while moderate earners often benefit more from employee status through an EOR.
Need for employee benefits: If pension and severance pay matter to you, employee status is clearly superior.
Hebrew language proficiency: If you are not fluent, having support in your language while maintaining employee status is invaluable.
Time and complexity tolerance: Managing a business file takes significant time; being an employee is dramatically simpler.
Long-term plans: If you are building a business that will grow and hire others, sole proprietorship makes sense. If you want to remain a solo freelancer, employee status offers better benefits.
 
For most freelancers, especially those just starting out, those with moderate income levels, or those who value simplicity and benefits, converting to employee status through a service like an EOR offers the optimal balance.

Frequently Asked Questions

An Osek Zair is a tax status, not a business registration type. Introduced in 2024, it allows self-employed individuals (both Osek Patur and Osek Murshe) with an annual turnover under NIS 120,000 to claim an automatic 30% tax deduction on their income without needing to provide receipts for expenses. This simplifies tax filing significantly

Failing to report income is illegal and can lead to significant penalties, back-taxes, and legal action from the Israeli Tax Authority. It is crucial to ensure your freelancer compliance in Israel from day one.

If you are an Osek Murshe or use an EOR service, you must add 18% VAT to your client invoices. The best practice is to quote your price and then add VAT on top. For example, if your fee is NIS 10,000, the invoice should be for NIS 11,800. If you fail to add it, the VAT will be deducted from your earnings.

Yes. You can either open a separate Osek file or use an EOR service to manage your freelance income. Using an EOR is often simpler as it avoids the need to file a complex end-of-year tax return that consolidates both income streams.

Costs vary, but they are typically a small percentage of your invoiced amount. For example, a service might charge a base fee plus 2-5% of your income. When you factor in the value of the employer pension contributions, severance pay, and saved accounting fees, it is often a cost-effective solution for many freelancers.

Certain professions are excluded from the Osek Patur status, including lawyers, doctors, architects, engineers, accountants, management advisors, insurance agents, psychologists, dentists, real estate agents, teachers, university professors, translators, interpreters, and artistic performers . If your profession is on this list, you must register as Osek Murshe.

As an Osek Patur, you must declare your annual turnover to the VAT office during January following the tax year, and submit your annual tax return (Form 1301) from March onwards. As an Osek Murshe, you must file VAT returns bi-monthly in addition to your annual income tax return. If you use an EOR service, your taxes are handled automatically, and you receive a Form 106 for simplified filing.

Osek Patur is a business registration status for small businesses under NIS 120,000 annual turnover that are exempt from VAT. Osek Zair is a tax status that provides a 30% automatic deduction on income for self-employed individuals earning under NIS 120,000. You can be both an Osek Patur and claim the Osek Zair tax status simultaneously.

References

[1] CWS Israel. “Freelancer Compliance & Advisory Services in Israel.” Accessed January 14, 2026.
[2] Government of Israel. “Small Business Owner – Income Tax.” Accessed January 14, 2026.
[4] Dray & Dray. “The Osek Patur Guide.” Accessed January 14, 2026.
[5] Dray & Dray. “Pension Contributions for an Atzmai.” Accessed January 14, 2026.

 

 

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