U.S. Self-Employment Tax for Americans in Israel: What You Need to Know
If you’re a U.S. citizen living in Israel and running your own business — whether as an osek patur, osek murshe, or through a company — you’re still required to file U.S. taxes each year. Even if you're paying full Israeli tax and Bituach Leumi, the IRS still wants to hear from you.
While tax tools like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) help avoid double taxation, there's a big catch: self-employment (SE) tax.
Why Self-Employment Tax Is an Issue
Israel and the U.S. don’t have a totalization agreement, which means self-employed individuals in Israel are usually subject to U.S. SE tax — on top of Israeli tax and social contributions. That SE tax rate is 15.3%, covering both Social Security (12.4%) and Medicare (2.9%).
So even if you're paying mas hachnasa and Bituach Leumi, the IRS still considers you self-employed and will typically expect SE tax payments on your net earnings.
Why Don’t Israeli Salaried Employees Have This Problem?
This issue mostly affects the self-employed. If you're a salaried employee in Israel, your income is not subject to U.S. SE tax. That’s because you're being taxed as an employee of a foreign company, and wages from foreign employers are not considered “self-employment income” by the IRS — even if you own the company that pays you.
Common Workarounds for U.S. Expats in Israel
There’s no perfect solution — just trade-offs. Below are four options people often explore to reduce or avoid SE tax. The best path depends on your income, business model, and risk tolerance.
1. Just Pay the SE Tax
For lower levels of income, this is often the path of least resistance. The tax bite is manageable, and you earn U.S. Social Security credits in the process. While the Social Security benefit isn’t generous, it’s still something. As your income grows, however, SE tax becomes more costly while the value of additional benefits declines.
2. Use a Payroll Provider
Companies like Deel or Route 38 can hire you as their employee and pay you via Israeli tlush (payslip). In this setup, you’re no longer “self-employed” under U.S. rules — so SE tax doesn’t apply. These services typically charge fees and have certain limitations, so it’s important to explore whether they’re a good fit for your work. In particular, ask them how they will manage your business expenses and issue receipts to your clients.
3. Form a Chevrat Bam (Israeli Ltd.)
Some business owners create an Israeli limited company, pay themselves a salary, and thereby avoid SE tax. But this route involves significantly higher accounting and compliance costs — often ₪18,000+ per year when factoring in both U.S. and Israeli reporting and also additional fees for banking, company registration, and the occasional legal expense. It usually only makes financial sense if you're earning ₪20,000+ per month in net profit. Keep in mind that you do get a potential pension benefit from your self-employment tax, which is not the case for your additional company expenses.
4. Form a U.S. Entity
In certain cases — such as consulting, coaching, or online services — there may be tax or operational advantages to forming a U.S. LLC or S-Corp. This won’t always eliminate SE tax, but it can simplify compliance or improve the tax picture overall. This option is highly case-dependent and should be carefully evaluated with a tax professional. Through use of an LLC, you might be able to avoid Israel bituach leumi taxes on this income. Check with your Israeli CPA.
Bottom Line: Which Route is Best?
There’s no one-size-fits-all answer. Each path comes with its own pros and cons, and the right choice depends on your income, business setup, and personal priorities. What works for one person may be completely wrong for another. At Cole+Waxman, we work with U.S. expats in Israel every day to weigh the options, run the numbers, and find a plan that fits both your business and your life.