Employing relatives

Tax Considerations When Employing Relatives in Your Business in Israel

When it comes to running a business, it is common to employ family members. In Israel, this is no exception. However, employing relatives can come with tax considerations that need to be taken into account. Let’s take a look at the tax considerations that you should be aware of when employing relatives in your business in Israel.

Why can it be a problem to hire family members?

Employing your spouse or another relative in your business can save tax because it allows you to split the income between both of you, potentially putting you both in a lower tax bracket and reducing the overall tax liability.

However, the tax office can view this arrangement with suspicion and may scrutinize it to ensure that your relative is genuinely providing services to the business and is being paid a fair and reasonable wage for those services. If they suspect that the arrangement is purely a tax avoidance scheme, they may disallow the tax deductions claimed or, in more serious cases, take enforcement action against you.

What to consider if employing a spouse or other relatives

To avoid being suspected of tax avoidance, it’s important to be prepared for the tax office to question you. Keep records of their duties, correspondence, and any other relevant information that can prove their contribution to the business. Additionally, make sure their salary is at market rates and keep backup evidence to support this. The tax office may even conduct unannounced visits to confirm that the family member is actually working for the business. By following these recommendations, you can ensure that your business practices remain legally sound.

Income Tax & Bitauch Leumi

Like the employment of any employee,  the salary of a relative is subject to Israeli income tax an Bituach Leumi. The tax rate will depend on the income level, but it can range from 10% to 47%. It is important to keep accurate records of the compensation paid to your relative and to report it to the Israeli Tax Authority. Employees must be paid via payroll and reported every month.

Conclusion

Employing relatives in your business in Israel can be a great way to keep your business within the family. However, it is important to keep in mind the tax considerations that come with this decision. By keeping accurate records, paying the correct national insurance contributions, and ensuring that related party transactions are conducted at arm’s length, you can avoid any tax issues and ensure the success of your business.Tax Deductible Expenses – What You Can Claim