Side income from work for salaried employeesTaxed correctly · and paid legally for side projects without opening a business
Want to earn on the side too? Here you will understand how the taxation of passive income and side income works in Israel · and how to get paid legally for active side work via NETO, on a payslip, without opening a business file. NETO is a payment platform for active work · not for passive investments.
AI summary · Side income for salaried employeesClick to read the page summary
A salaried employee in Israel has two main ways to earn on the side, and each is taxed differently. Passive income (rent, interest, dividends, capital gains) comes from an asset and is taxed by income type · usually via withholding at source or an annual return, sometimes with an exemption ceiling. Active income (side projects and services) is work in every respect and must be reported. A salaried employee with additional income must carry out National Insurance contribution coordination. To get paid legally for active side work without opening a business · you can work through NETO, receive a payslip with social benefits, at a 5% commission derived from the invoice. NETO is for active work · not for passive investments.
- Passive vs active · completely different taxation for each.
- Real estate · three tracks · exempt up to a ceiling, 10%, or marginal.
- Capital market · interest and dividends usually withheld at source, capital gains 25%.
- National Insurance coordination · mandatory for anyone with several income sources.
- Side work · legal payment via NETO on a payslip · without opening a business.
- The information is general only · not tax advice · check every case individually.
Key points
Want to make money even when you are not working? The idea of passive income attracts many salaried employees looking for extra income without doubling their working hours. Before you start · it is worth understanding the tax rules and the difference between passive income from an asset and active side work.
- Passive income does not depend directly on your working time · it keeps coming in even when you are not active.
- Every passive-income channel in Israel has different tax and insurance implications.
- Salaried employees with additional income must carry out National Insurance contribution coordination.
- The common channels · rental real estate, the capital market and digital products.
- Active side work can be priced and paid legally via NETO · on a payslip, without opening a business.
Why salaried employees in particular should consider side income
Salaried employees are in a unique position when it comes to additional income. They have the basic stability of a fixed salary, which allows them to take more calculated risks in building additional income sources. Instead of waiting for retirement or hoping for a raise, you can start building income-generating assets today.
The main advantage is diversifying income sources. When all your eggs are in one basket, any change at your workplace becomes a crisis. Additional income creates a safety net that allows greater flexibility in career decisions.
For salaried employees thinking about side projects, NETO's system makes it possible to manage the financial side simply and in an orderly way. Instead of dealing with complex bureaucracy, you can focus on building the income itself. If you are also considering self-employment alongside your job, read about freelancing while employed.
What is the difference between passive income and a second job as a freelancer
Many people confuse the two, but the difference is very significant. A second job as a freelancer is active income in every respect · you swap time for money, only now you have two employers instead of one.
Real passive income works differently. After an initial investment of time, money or skill, the income keeps flowing with minimal involvement. A rental apartment, for example, requires effort to buy and to find a tenant, but after that the rent comes in every month without needing to work for it.
The tax implications are completely different. A freelancer pays income tax and National Insurance as a self-employed person on their income. A passive-income earner pays according to the specific income type, and sometimes enjoys lower tax rates or even exemptions.
National Insurance and health contributions and the duty to coordinate
When you have income sources beyond your salary, the National Insurance Institute wants to know about it · whether it is a small side income or profitable projects. The reporting duty exists, and it is important to understand how it affects your payments.
The system sets a clear order of priority for attributing income · first income as an employee is counted, then as a self-employed person, and only last income not from work. This order affects the amount of contributions you will actually pay.
For non-workers and those with non-employment income
Someone with non-employment income pays National Insurance and health contributions under specific rules. There is a monthly exemption threshold below which there is no charge at all, and above it there are brackets with different rates. The rates are updated from time to time, so it is important to check the current figures on the National Insurance website.
Contribution coordination for salaried employees with additional income
A salaried employee with additional income sources needs to carry out National Insurance contribution coordination · when there are several employers, or when there is income from other sources such as renting a property or investments. The order of income attribution determines from which income deductions are taken first, and the reporting duty is on the insured person. Detailed information on contribution coordination is available on the National Insurance website, and on tax coordination for salaried employees on our dedicated page.
Common passive-income channels and Israel's tax requirements
In Israel there are several main channels for passive income, each coming with different tax rules. Understanding the structure is essential for proper planning and to avoid surprises at year-end.
| Income channel | Typical tax rate | Reporting requirements |
|---|---|---|
| Residential rent | Exempt up to ceiling / 10% / marginal | Annual return or opening a file |
| Interest on deposits | 15%-25% | Withholding at source / form 116b |
| Dividends | 25%-30% | Withholding at source |
| Capital gains | 25% | Reported in the annual return |
| Royalties | By income classification | Depends on the nature of the activity |
Passive income from real estate · renting out properties
Renting out an apartment is one of the most popular channels in Israel, with three main tax tracks. The exemption track lets you receive rent up to a certain ceiling without paying any tax at all. Above the ceiling you can choose the 10%-tax track on all income, without the option to deduct expenses. Alternatively there is the marginal track, which charges according to the regular tax brackets but allows deducting expenses such as depreciation and maintenance. Full information on opening a residential-rental file is available on the Tax Authority website.
Passive income from the capital market · interest and dividends
Capital-market investments generate passive income in several forms · interest from deposits and savings plans, dividends from shares, and interest from bonds. Usually the tax is withheld at source by the bank or broker, but there are options for tax benefits such as form 116b for reduced withholding on interest for those who meet the eligibility conditions. Capital-gains tax in Israel is 25% for individuals, with a higher rate for substantial shareholders · understanding capital-gains tax is essential for every investor.
Intellectual property and royalties
Creating intellectual property such as books, music, patents or digital courses can generate royalties over years. The tax classification depends on the nature of the activity · if it is an active business producing content on an ongoing basis, the income will be considered business income. If it is a one-off creation made in the past, the treatment may be different.
Legal payment for side projects via NETO · without opening a business
If your side income is active work · freelancing, a service or a one-off project · it is not passive income but work that must be reported. Instead of opening a business file, you can receive the payment through NETO on a payslip with social benefits (National Insurance, pension and severance), at a 5% commission derived from the invoice the client pays. Here is how it works in four steps.
Sign up for free
A quick online sign-up as a freelancer · no opening a file with the authorities and no cost.
Issue an invoice
You issue the client an invoice · one-off or periodic · for the work you performed.
The client pays
The client pays the invoice amount, and NETO takes a 5% commission from it (before VAT).
You receive a payslip
You receive payment on a payslip with lawful deductions and social benefits · everything legal and orderly.
Want to dig deeper? Read the full guide on side income for salaried employees and taxes for freelancers.
Comparing passive-income channels by key parameters
| Parameter | Rental real estate | Capital market | Digital products |
|---|---|---|---|
| Initial capital required | Very high | Flexible | Low |
| Time to return | Immediate after purchase | Immediate | Months to years |
| Ongoing maintenance | Medium | Low | Varies |
| Risk | Medium | Varies | Low to medium |
| Liquidity | Low | High | High |
Common mistakes that cost money and tips for combining with work
Thinking passive = tax-exempt
The Tax Authority sees this income, and there is a duty to report and pay. Ignoring it can lead to fines and interest.
Not coordinating National Insurance
With several income sources, without proper coordination you may pay too much or too little · both situations are problematic.
Choosing the wrong tax track
In renting an apartment, choosing the 10% track when you have high expenses may cost more than the marginal track. Do the math before deciding.
How to start building passive income without a large capital
You do not necessarily need a lot of money to start. The three-resources model says you need at least two out of three · money, time or skill. Someone without capital can invest time in building a digital asset, or use an existing skill to create a product that can be sold again and again. A small, gradual start is the smart approach · a small pilot, testing demand and learning before expanding.
Tips for combining passive income with work
Advance financial planning is the key. Before you start, it is worth sitting with an accountant or tax adviser to understand the implications for your overall situation · what looks profitable gross may be less attractive after tax. Ongoing monitoring of changes in tax and National Insurance law is essential · the rules change and ceilings are updated. And if you are a salaried employee considering also working as a self-employed person, check out how to become self-employed and gig and temporary work.
Frequently asked questions
Is all passive income tax-exempt?
No. Each channel has different tax rules. Sometimes there are exemption ceilings or reduced rates, but in most cases there is a duty to pay tax. It is important to check every case individually and consult a professional before making decisions.
Do I have to report passive income to National Insurance?
Yes, there is usually a duty to report non-employment income. You may be charged National Insurance and health contributions, depending on the income amount and your employment status. Failing to report can lead to retroactive charges and fines.
Can I be a salaried employee and also generate passive income without harming my rights?
Usually yes, but you should check the tax and contribution implications. Additional income may push you into a higher tax bracket or affect eligibility for certain benefits. It is advisable to consult a professional to understand the full picture.
How long does it take to see income from a passive channel?
It varies greatly by channel. Capital-market investments can yield an immediate return. Rental real estate starts generating income right after finding a tenant. Digital products may require months of work before the first income.
Do I need to open a business to generate passive income?
Not always. Income from rent, interest or dividends does not require opening a business. But if it involves selling products or services on an ongoing basis, you may need to register as a dealer or open a file with the Tax Authority.
How do I know whether income is considered passive or active for tax purposes?
The classification depends on the nature of the activity and the degree of ongoing involvement. The Tax Authority examines whether it is an active business or income from an existing asset. In borderline cases it is advisable to get a professional opinion.
I have active side projects · how do I get paid legally without opening a business?
You can work through NETO · you issue the client an invoice, the client pays, and you receive payment on a payslip with social benefits, without opening a business file. The commission is 5% derived from the invoice the client pays (before VAT). The solution suits active work · not passive income from assets.
Is NETO suitable for passive income from rent or the stock market?
No. NETO is a payment platform for active work (freelancing, services, projects). Passive income from assets such as rent, interest, dividends or capital gains is subject to separate tax tracks through the Tax Authority, as detailed on this page.
What to check before starting a side project
Before jumping in, there are a few critical questions. Is there a conflict of interest with your current workplace? What does your employment contract say about additional work? Is there a specific company policy? Setting clear boundaries is essential · how many hours a week you are willing to invest, and what the budget for the initial investment is. And a financial-feasibility check · what the costs are, when the first income is expected and where the break-even point is · is a step you must not skip.
Do you have active side work?
Get paid legally on a payslip, with social benefits, without opening a business · at a 5% commission derived from the invoice. Sign-up is free and fast.
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