Employed with a side project that earns money? Here is how it really works
You are employed, perhaps in tech, and in the evenings you built something of your own: a small SaaS, a plugin, an app, a course. Now it earns money, and you discover nobody really explained how that fits with the payslip. How much tax will you pay on the extra income? What about National Insurance, twice? And will the employer get some kind of notice? In this guide we set out the whole picture, with the updated 2026 figures and without the scare stories.
The principle everything follows from: the side income sits on top of the salary
Income tax in Israel is calculated on your total taxable income from all sources together. Salary and business profit combine into one figure, and the tax brackets apply to that. The practical meaning: the profit from the project does not start climbing the brackets from zero. It enters above the salary, and is therefore taxed at the bracket you are already in (your marginal rate) and upwards.
| Monthly income (2026, earned income) | Tax rate |
|---|---|
| Up to 7,010 ILS | 10% |
| 7,011 to 10,060 ILS | 14% |
| 10,061 to 19,000 ILS | 20% |
| 19,001 to 25,100 ILS | 31% |
| 25,101 to 46,690 ILS | 35% |
| Above 46,690 ILS | 47% |
| Above 60,130 ILS | plus 3% surtax (50% in total) |
An example: an employee on a gross salary of 30,000 ILS a month sits in the 35% bracket. A side project earning (after expenses) 5,000 ILS a month means every one of those shekels is taxed at 35%, plus National Insurance and health contributions. Sounds annoying? First, this is everyone's situation. There is no "penalty" here on employees. And second, further down we will see what does work in your favour: recognized expenses, offsets, and the fact that tax is paid on the profit rather than on the turnover.
National Insurance - do you pay twice?
Not exactly, but you do pay on both sources. On the salary, contributions continue to be deducted through the payslip as usual. On the business income, the first question is whether you meet the National Insurance Institute's definition of a "self-employed worker". The definition is examined by three alternative tests:
- You engage in your occupation at least 20 hours a week on average; or
- Your average monthly income from the business is at least 50% of the average wage in the economy; or
- You engage in the business at least 12 hours a week and your income is at least 15% of the average wage.
If you meet the definition, you register as self-employed and pay contributions on the business income too (at self-employed rates), in addition to what is deducted from the salary. If you do not meet it, in National Insurance language a "self-employed person who does not meet the definition", the treatment differs, and in some cases the income is charged at other rates or exempt up to a ceiling. This is an area with a fair number of nuances (and implications for entitlements such as work injury benefits), so in borderline situations it is worth simply asking us.
A point about entitlements: registering correctly with the National Insurance Institute is not only an obligation. It is also what ensures you are covered as self-employed, for example in a work injury within the project. Correct reporting means correct cover.
Facing the employer: what is allowed, who knows, and what to check
Let us separate three questions that get mixed up for everyone:
- "Will the Tax Authority tell my employer?" No. Opening a business file is not reported to the employer and does not appear on any document they receive. Your tax affairs are between you and the authorities.
- "Am I even allowed to?" That is a contractual question, not a tax one. Check your employment agreement for clauses on additional occupation, conflict of interest and non-competition. In tech a broad intellectual property clause is also common, and it matters to make sure that what you build in your own time, on your own equipment and outside your employer's field of business really is yours. We are not lawyers and will not give legal advice, but we do tell every client: check this before the product is worth something, not after.
- "What about tax coordination and advances?" As a self-employed person you will pay the tax on the business profits through monthly or bi-monthly advances and an annual return, not through the payslip. There is no need to "coordinate" the business with the salary. The final calculation is settled in the annual return, where the salary (Form 106) and the business meet.
Which status fits an employee with a project: patur, murshe or zair?
Being employed in parallel does not restrict you. An employee can be an osek patur, an osek murshe or on the esek zair track. Some rules of thumb:
- Osek patur is the convenient default when the side income is small and the clients are private Israelis. Minimum bureaucracy.
- Osek murshe becomes a serious candidate when your clients are abroad (there is a built-in advantage most people miss here, zero-rate VAT), when the clients are businesses, or when the income is expected to pass the ceiling.
- The esek zair track (for income tax) means an automatic deduction of 30% of turnover as an expense, with no receipts, and a shortened filing. It can be excellent for a lean side project. Note a caveat that is especially relevant to employees: the track is closed where the income comes from your employer (or someone who was recently your employer), meaning it cannot be used to "convert" a salary into invoices.
The full comparison, including the clients-abroad angle relevant to most builders, is in the statuses guide.
So is it even worth it? (Yes. Here is why)
After all the numbers, it matters not to lose the picture: tax of 35% means 65% stays with you, on income that did not exist before. And several things work in your favour:
- Tax applies to the profit, not the turnover. The AI subscriptions, the servers, the equipment: recognized expenses that reduce the taxable income.
- A loss in the building phase may be offset. If the business is genuinely at a loss (expenses higher than income), in some cases it can be offset against other income in the same year, including the salary. Subject to the rules, and worth checking with us.
- The project builds you an asset. In tax terms too: an orderly business with clean books is worth more on the day you want to sell it or raise on it.
- You learn to be self-employed at zero risk. With a salary behind you, this is the safest way to build the move to working for yourself, if you want it.
Want to know exactly how much will stay in your hand from the project? Tell us the numbers and we will run the calculation on your case.
A licensed Israeli CPA (license no. 500125101) accompanying businesses and self-employed clients across Israel - including founders, builders and owners of digital products. Bookkeeping, filings to the authorities, annual reports and personal financial guidance. About Adir →
Official sources
- Kol Zchut - income tax brackets 2026 (Hebrew)
- National Insurance Institute - who is a self-employed worker (the three tests) and the contribution rates (Hebrew)
- Kol Zchut - the esek zair track (conditions and caveats) (Hebrew)
- Kol Zchut - offsetting business losses (Hebrew)
The information in this guide is general only, current as of August 2026, and does not constitute tax advice or a substitute for professional advice fitted to your business's circumstances. It is a condensed adaptation of our fuller Hebrew guide. For personal advice - talk to us.
Employed plus a business - the questions everyone asks
Will my employer be notified that I opened a business?
No. The Tax Authority and the National Insurance Institute do not notify an employer about the opening of a business file, and it does not appear on the payslip or on any document the employer is exposed to. The only thing worth checking is your agreement with the employer, the clauses on additional occupation and intellectual property, and that is a contractual and legal matter rather than a tax one.
How much tax will I pay on the income from the project?
At your marginal bracket: the business income is added on top of the salary. An employee in the 35% bracket will pay 35% income tax on the project profits, plus National Insurance and health contributions according to their status. Importantly, the tax applies to the profit after recognized expenses, not to every shekel that comes in.
Do I have to open a business if I already have a file as an employee?
A "employee file" does not really exist. As an employee, the employer deducts tax at source for you and that is that. The moment you have ongoing independent business activity, registration as a dealer (for VAT) and opening a self-employed file at income tax and the National Insurance Institute are required, alongside continuing to work as an employee. The two worlds live together peacefully and meet once a year in the annual return.
Can I offset losses from the project against my salary?
In some cases yes: a current business loss can in principle be offset against taxable income from other sources in the same tax year, including salary, subject to the conditions of the Ordinance. But this is an area the Tax Authority examines carefully (especially when a "business" loses money year after year), so it matters that the loss is genuine, documented, and that there is business logic behind the activity. Do not build tax planning on it without support.
Will the side income require me to file an annual return?
Yes. A self-employed person, even with a small business alongside a salary, must file an annual income tax return, in which all the income meets: Form 106 from the employer and the business profits. This is not a punishment. It is also where your recognized expenses reduce the tax, and sometimes a refund even emerges. Those represented by an accountant also benefit from a convenient extensions arrangement.
What about RSUs and options from work - do they affect this?
Grants from the employer are taxed on their own track (usually Section 102) and are not directly connected to the side business. They do affect the overall picture, for example the total income that determines the marginal bracket in a vesting year, and the surtax. If you have both RSUs and an earning project, it is worth having one annual plan that sees both sides together.