Money cash Shekels currency 521.
(photo credit: Reuters)
On November 3, the National Insurance Institute (NII) warned that people who use
payroll companies may be assessed higher contributions, ranging up to 16.23
percent applicable to the self-employed.
In practice, the NII is already
using strong tactics, including investigations and sudden demands for
retroactive contributions, sometimes going back two years or more.
follows a judgment in the NII’s favor handed down by the Tel Aviv Labor Court on
May 13 (Bama Communications Co.Ltd. vs NII). Many small business people
may be affected.
What is it all about?
A practice has grown up in Israel
(and elsewhere) whereby individuals in business seek to pay their taxes with
less fuss and contact with the tax authorities by using the services of payroll
companies. The payroll company is hired to collect fees from clients instead of
the individual concerned, issue an invoice and pay the individual a “salary”
equaling the fees minus a processing commission ranging from
The payroll company also withholds from the “salary” income tax
and NII payments at rates applicable to employees, and it will optionally also
deal with pension contributions.
Over the years, the Income Tax Authority
(ITA) turned a blind eye to the practice as it gets its tax, but not the
What did the court decide?
The Bama court judgment dealt with a
number of payroll companies and their users and is regarded as a decision on an
important matter of principle. It remains to be seen if it will be
According to the Bama court judgment, “The employment model of
the claimant companies... relates to companies whose aim is to exempt
self-employed persons from the burden of dealing with the tax authorities and
the NII. There is no link or connection between the claimant companies and the
services provided by the employees registered with them, to the service
recipients... Our conclusion is that there are no employeremployee relations in
the framework of this transaction.”
The court also ruled out the
possibility that the payroll companies are labor contractors. They were not
registered as such nor did they meet one of the criteria for labor contractors:
outsourcing of a function, authentic employment via manpower companies, or
companies for channeling salary payments.
What are the criteria for being
The NII announcement gave a number of criteria based on the Bama
A negative answer to any of the following questions may
indicate that you are self-employed rather than an employee, at least for NII
purposes: 1. Does anyone determine what you are assigned at your work place? 2.
Does anyone move you from one function to another where you work? 3. Does anyone
have the power or authority to fire you or stop you working? 4. Is there anyone
you must go to for permission to take a vacation? Or to notify lateness,
absence, sickness or reserve duty? 5. Does anyone supervise your work? 6. Is
your presence recorded at your work place? Additional questions that may
determine your status as an employee or self-employed: 7. Is your salary
dependent on receipt of consideration from another party? 8. Is your salary
prone to sharp fluctuations based on payments from a third party, and do you not
enjoy a base salary each month? 9. Do you decide together with the person
placing an order the size of the payment? 10. Do you decide which work to accept
or reject? Consequences According to the NII announcement, if your replies show
you are not an employee, you should register at the NII as selfemployed by
filling out its multiyear report form BL/6101.
If your replies suggest
you are an employee, the NII announcement says you should let the NII know why,
and the NII will check your claimed status. It is hard to believe that every
employee in the economy is expected to go to the NII for a status
The above is little short of scandalous. The
small-business sector is being hit for paying all its taxes efficiently via
And a number of people now find themselves facing NII
questioning and large retroactive NII liabilities.
of state maternity grants and other social-security benefits find they must pay
money instead of receive it. Mothers will not enjoy the experience straight
Anyone agreeing to retroactive self-employed status for
NII purposes must then file income-tax returns on this basis (to get the 52%
deduction and report their revenue) and go to the VAT Office to register and
hand over VAT on their revenue from the payroll companies going back months or
years, not to mention penalties for lateness.
What seems to be going on
is a turf war between the NII and the ITA. Self-employed people pay higher NII
payments than employees (16.23% vs 12%) and can deduct 52% of what they paid as
an expense for income-tax purposes. So the NII wants to collect more at the
expense of the ITA.
What is the solution?
The government ought to
intervene. Penalizing small businesses and giving big tax breaks to big
businesses does not look good. Anyone affected should seek professional advice
Here’s a tip not found in the NII announcement. The Bama
judgment instructs the NII as follows: It must check all the data, and whenever
an offset (of a NII claim) or other settling-up is appropriate, the NII must do
so on the basis that double payment is not appropriate.
consult experienced tax advisers in each country at an early stage in specific
firstname.lastname@example.org Leon Harris is a certified public accountant
and tax specialist at Harris Consulting & Tax Ltd.
Join Jerusalem Post Premium Plus now for just $5 and upgrade your experience with an ads-free website and exclusive content. Click here>>