Israel has a thriving tech sector and talented workforce, which makes it a great place for global companies to recruit and hire independent contractors. But for the uninitiated, navigating Israeli laws can be complex. There are varying types of self-employed workers subject to different tax obligations. Companies also need to be mindful of misclassification risks, to avoid penalties from Israeli authorities.
While thorny, all the paperwork is important. If you want to render an Israeli contractor’s services, you need to make sure you can pay them quickly and compliantly. What’s the best way to do this? Read along for our step-by-step guide.
Step #1: Classify your workers in Israel
Israeli authorities draw clear distinctions between independent contractors and employees. If an employer is found to misclassify a worker who is, in practice, an employee, the company will have to retroactively administer benefits, including:
- Severance pay
- Annual leave
- Recuperation pay
If an employee classified as a contractor is found to make a higher wage instead of getting benefits, the excess salary can be deducted from the employee’s income to fund their benefits.
Misclassification can also result in fines from the Israel Tax Authority. So how do you distinguish the two worker classes? Israeli courts often look beyond the written agreement between worker and company, using a series of “tests” to gauge the type of relationship. The table below lists common criteria.
High level of worker control.
Contractors can generally work on their own schedules, so long as they render the services they’re responsible for. There’s limited supervision from the client.
More direction from the employer. Employees usually receive more direction from their employer, working for a set period of time every week and often from a specific location.
Contractors use their own tools and equipment.
Equipment and tools are typically provided by the company.
Less integrated. Contractors often work remotely and asynchronously and are not privy to day-to-day office norms.
Highly integrated. Employees have more of a presence within the company and participate in daily company business.
Limited entitlement to benefits. Israeli contractors get the same health and pension benefits the government guarantees every citizen but are not eligible for other statutory entitlements.
Entitled to benefits. Employees are entitled to statutory employment benefits and protections, such as vacation days, maternity leave, and severance.
Time-bound engagement. Contractors are typically hired for a specific project or period of time, as stipulated in a written agreement.
Indefinite engagement. Employees are generally hired for an indefinite time period.
Non-exclusive services. Contractors can render services for other clients for similar work unless expressly prohibited in a written agreement.
Exclusivity of service. Usually stipulated in employment contracts, employees work for their company and are often prohibited from doing work for other companies simultaneously.
Subcontracting. Contractors can assign tasks to be performed by another individual or business.
No subcontracting. Employees are expected to do their work themselves unless they have permission from their employer to delegate it to someone else.
Submits invoices. Contractors typically invoice their clients for payment after a preset period or upon completion of a project.
On company payroll. Employees are paid at least monthly via direct deposit in Israeli shekels (ILS).
In addition to the above distinctions, the Israeli government’s National Insurance Institute (NIS) states that self-employed workers fit at least one of the following criteria:
- Work an average of at least 20 hours per week
- Average monthly income exceeds half of the average wage
- Work an average of at least 12 hours a week and income exceeds 15% of the average wage
If an independent contractor isn’t in one of those groups, they’re often not obligated to pay taxes for statewide benefit contributions.
Step #2: Determine the best way to pay your contractors in Israel
Companies need to figure out how to pay self-employed workers before sending them a contract. The most common payment methods for Israeli independent contractors include:
- Bank wires. You can directly deposit funds to Israeli contractors if you open an Israeli bank account, or use your native bank account to send a global wire transfer through the SWIFT network. The latter option comes with banking fees and sometimes other service charges.
- International money orders. This method involves sending a physical payment in the mail to an Israeli contractor. But this requires a commute on each end—first, companies have to go to a Western Union, bank, or post office to purchase the money order; then, contractors have to go to their bank for a deposit once it’s received. In addition to this being slow and cumbersome, money orders also come with wire fees and unfavorable exchange rates.
- Digital wallets or payment platforms. Companies can also use online services like Wise and Paypal to transfer funds. But keep in mind that some payment platforms are unavailable in Israel (e.g., Venmo only works within the US). Popular digital wallets in Israel include Paybox and Bit. Many of these platforms have vendor fees though, and you have to consider exchange rates that are constantly fluctuating.
- Global payroll services. Since independent contractors don’t get their taxes withheld, they aren’t typically in the same payroll system as employees. Foreign employers often hire Israeli workers through “umbrella companies” such as an Employer of Record, which can make it difficult to pay both classes of workers in the same system. But some global payroll platforms, like Rippling, allow you to pay Israeli contractors alongside your full-time employees—all in a single pay run.
Step #3: Use global payroll software to process payments for Israeli contractors
Instead of worrying about service fees, volatile exchange rates, and slow processing times, you can pay Israeli contractors through global payroll software.
With Rippling, not only can you pay employees and contractors around the world simultaneously, but you can also pay Israeli contractors in shekels automatically. Rippling also generates locally compliant consulting agreements and stores them all in an easy-to-use platform.
Here’s a glimpse of Rippling in action:
Step #4: Ensure your Israeli contractors have the right tax information
Employers aren’t responsible for withholding taxes on an Israeli contractor’s behalf. That said, Israeli authorities require independent contractors to pay a personal income tax, National Insurance Fund (Israel’s social security) contributions, health insurance contributions, and often a Value Added Tax (VAT) if business income exceeds ILS 102,292. Contractors can check with the Israel Tax Authority to confirm their VAT status.
In order to file taxes, Israeli contractors typically need a:
- Business bank account
- Registered self-employment profile with the National Insurance Institute
- Declaration of assets
- 6101 Multi-annual income report
- Self-employment certificate
- VAT registration number (if applicable)
- Personal income tax registration with the Israel Tax authority
- Personal income tax return
Self-employed workers also need to declare specific contractor categories for tax purposes. Keep in mind that many professional occupations—including architects, doctors, and university lecturers—can’t register as osek patur (a certain category of self-employed worker), even if the work is freelance. These occupations need to pay VAT.
Unless you’re an expert in Israeli labor law, determining tax obligations for independent contracts can be tricky. But, one of the benefits of running payroll through a global system like Rippling is offloading the paperwork.
Frequently asked questions about running payroll for contractors in Israel
Do you need to withhold taxes when paying contractors in Israel?
No, employers don’t need to withhold taxes on an Israeli contractor’s behalf. The contractor, however, has to contribute to Israel’s social security scheme monthly (through the National Insurance Fund), state health insurance, a personal income tax, and, if applicable, a value-added tax.
Employers withhold these taxes on an employee’s behalf (which are deducted from their remuneration), in addition to making annual severance, pension fund, and disability contributions.
What is the minimum wage in Israel?
As of April 2023, Israel’s minimum monthly salary is ILS 5,571 for a full-time employee. This was a 5% increase from the prior minimum.
Do Israeli contractors get benefits?
All Israelis, including all independent contractors, are entitled to state-funded health insurance and pension. Other employee benefits—including paid annual leave, sick leave, parental and bereavement leave, and termination protections—are not granted to self-employed workers.
Can you pay contractors in Israel in your home currency?
You can pay Israeli contractors in a foreign currency, but it’s generally preferable to pay them in their local currency—shekels.
What is the difference between an osek patur and osek murshe?
Osek patur and osek murshe are both Hebrew terms for different types of Israeli independent contractors. The difference, for tax purposes, is as follows:
- Osek patur: A solo entrepreneur operating their own business making less than ILS 107,692 annually. Many professional and literary occupations aren’t eligible.
- Osek murshe: A self-employed classification for workers above the aforementioned income threshold who have to report and pay VAT.
How do you turn a contractor into an employee in Israel?
After working with an Israeli contractor for a while, you may want to give them more responsibility and hire them as a full-time employee. Onboarding that freelancer can be a logistical and compliance nightmare, but instead of hiring an Israeli employment law expert to manage the transition, you can use Rippling. The platform quickly transitions contractors to full-time employees—with legally compliant paperwork, benefits administration, payroll, and more.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.