Invoicing via a Service or Opening a Business?The full difference · costs, taxation and rights, and who each track suits

Invoicing through a service is an employment model in which a licensed manpower company issues an invoice to the client on the worker's behalf. The worker is not required to open a business file with the tax authorities, and receives a payslip from the intermediary company. According to the National Insurance Institute, such a worker is defined as a salaried employee for all intents and purposes.

The model works as follows: the worker performs the work for the client, the intermediary company issues a tax invoice to the client, collects the payment and transfers the money to the worker after deducting a commission and taxes. The worker receives a legal payslip that includes all the required deductions.

Advantages of the model

The main advantage is the absence of paperwork. There is no need to open files with VAT, the Tax Authority or National Insurance. There are no monthly or bi-monthly filings, and no need for accounting services for day-to-day management. The worker enjoys the social rights of a salaried employee, including pension contributions and vacation days.

Disadvantages of the model

The commission charged by the intermediary company reduces net income. It is usually a commission of 3.5% to 5% of the invoice amount. Over time, the sums add up to a significant amount. There is also no full flexibility in managing business expenses and offsetting input VAT.

Opening a licensed business requires registration with three bodies: VAT, the Tax Authority and National Insurance. The process begins at the VAT office with Form 821 and continues by opening a file at the Tax Authority using Form 5329. Finally, you must register with National Insurance using Form 6101.

According to the Kol Zchut guide, a licensed business must charge VAT to its clients and remit it to the authorities. In return, it is entitled to offset input VAT on business expenses. The VAT reporting obligation is monthly or bi-monthly, depending on the annual turnover.

The cost of invoicing through a service consists of a fixed commission on each invoice. For example, on an invoice of ILS 10,000 with a 5% commission, the cost is ILS 500. In addition, taxes are deducted from the payslip.

The cost of running a licensed business includes accountant fees ranging from ILS 300 to 1,000 per month, depending on the scale of activity. To this you must add the cost of the time invested in ongoing filings and in submitting the annual returns. On the other hand, a licensed business benefits from offsetting input VAT, which can amount to thousands of shekels a year.

Invoicing through a service suits salaried employees who want additional income without dealing with paperwork. It also suits freelancers at the start of the road who do not yet know whether the activity will develop into a permanent business. It likewise suits anyone who prefers to focus on the work itself rather than on bookkeeping.

Opening a licensed business suits anyone planning steady, long-term business activity. It also fits when income is high and the per-invoice commission becomes relatively expensive. A licensed business is essential for regulated professions such as lawyers, accountants and doctors, who are required to register this way by law.

A worker who issues invoices through a service enjoys the rights of a salaried employee. They accrue seniority toward eligibility for unemployment benefits, receive pension contributions from the employer and are covered by work-injury insurance. According to National Insurance clarifications, these workers are recognized in the system as salaried employees for the purpose of receiving benefits.

A licensed business is not entitled to unemployment benefits. It is independently responsible for pension contributions and for disability insurance. Since 2017 there has been a legal obligation for the self-employed to contribute to a pension, but the contribution comes entirely out of their own pocket, with no employer participation.

*As part of our agreements with the National Insurance Institute, we are required to clarify that Bareket IT Ltd, under its commercial name NETO, operates as a manpower company (Licence No. 1565), and is therefore permitted to employ workers to perform work for service purchasers (clients), within the framework of the Classification of Insured Persons and Determination of Employers Order. NETO is permitted to employ service providers even if they do not meet all the definitions of an employer-employee relationship. However, for workers who do not meet the definition of manpower workers, the National Insurance Institute may examine their status and decide whether they meet the criteria and are entitled to be insured as employees or as self-employed (mainly regarding benefits such as unemployment).

**It is important to clarify that NETO provides full social terms by default, but the worker or the employer does not always choose this, so the employment agreement will spell it out. NETO also operates in some cases according to labor law and in some cases according to the Classification of Employers and Determination of Insured Persons Order · this varies according to the nature and period of the work, the terms of the agreement and the definitions in the law. There are cases in which the employer-employee relationship exists as a triangular relationship, as defined in the Manpower Contractors Law.

***The information on this page provides a general overview only and does not constitute legal, accounting, tax or professional advice of any kind. Use of this information is at the reader's sole responsibility, and it should not be relied upon for making decisions. Before taking any action, it is recommended to consult a qualified lawyer, accountant or tax advisor.

NETO's services are provided according to the circumstances, in accordance with labor laws and in accordance with the terms of Manpower Contractor Licence No. 1565.