Your taxes: NII chases payroll company users

NII chases payroll company users

Money cash Shekels currency 521 (photo credit: Reuters)
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.
This 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 2.5%-10%.
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 NII.
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 appealed.
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 self-employed?
The NII announcement gave a number of criteria based on the Bama judgment.
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 check.
The above is little short of scandalous. The small-business sector is being hit for paying all its taxes efficiently via payroll companies.
And a number of people now find themselves facing NII questioning and large retroactive NII liabilities.
Furthermore, claimants 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 after childbirth.
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 immediately.
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.
As always, consult experienced tax advisers in each country at an early stage in specific cases.[email protected] Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.