Here at Route 38, we often get asked, “Why can’t I be a W-2 in Israel?” Many olim assume that they can simply work for an American company while living here, in exactly the same way they did before they made aliyah. Unfortunately, this is far from the truth.
What Is a W-2 employee?
A W-2 employee is someone whose employer deducts taxes from their paychecks and reports on this to the government. At the end of every tax year, the employer must send its employees their Form W-2, which delineates all the income earned and taxes withheld. This form is also sent to the IRS. W-2 doesn’t apply to contracted or self-employed workers.
There is no law in the United States against hiring employees in other countries, but the US company would have to comply with Israeli labor law as it relates to taxes, employee rights and other statutory commitments. They would also have to open a payroll tax file with the Israeli Tax Authority.
If you’re a recent oleh and physically work in the US while commuting back and forth to Israel, you can work as an employee of a US company with a W-2. You will need to pay taxes on any income earned while in Israel, but will be exempt from Israeli taxes on money earned while physically in the US.
Sounds simple, right? Unfortunately, the US company now has a potential Israeli tax exposure on its Israeli source profits. Additionally, the company must operate Israeli tax withholding, pay taxes to the Israeli government and register at the VAT office and pay VAT. Most American companies don’t want to take on these responsibilities, so they won’t employ an Israeli on a W-2.
Alternatives to working as a W-2 employee
You may be wondering, if it’s so complicated to work for a US company, how is it that I know so many Israelis/dual citizens who are doing it? There are three popular alternatives to working as a W-2 employee:
- Freelancing
- Employment by an Israeli Employer of Record service (payroll company)
- Open your own Israeli company (Chevra Ba’am)
If the company you want to work with is open to both these options, consult with an accountant who understands US and Israeli tax law to figure out which is best for you. It’s possible that you may decide that it’s more beneficial to seek employment with an Israeli company, or you might find a solution that works for you and for the US company, and enjoy a fruitful business relationship with them for the long-term.
Ways to work from Israel for a US-Based company
As you can see, a foreign employer can’t directly employ you overseas without setting up a payroll tax file or legal entity here. Since this opens the company up for tax exposure issues, they are unlikely to want to do this for only one employee. Let’s look more deeply at the other ways that you can work from Israel for a US-based company and consider the pros and cons of each option so you can choose the one that’s best for you.
Become a freelancer
You can set yourself up as a freelancer in Israel and the employer will then contract you as a consultant.
Freelancing can be a blessing and a curse. If you were a classic freelancer working for more than one client, you would enjoy the advantages of making your own schedule, deciding which clients to work for, setting your own prices and not having a boss-employee relationship to contend with. On the other hand, you wouldn’t get vacation or sick days, you would pay more into Bituach Leumi and you would have no steady income.
When you set yourself up as a freelancer for the purpose of working with an American company, you still have no legal rights such as vacation and sick days, you will have to pay Bituach Leumi as a freelancer and will most likely need an accountant to manage your books. If you are an American citizen, you will also have to pay Social Security taxes in the US. But if you are working for a US company, you likely won’t get to make your own schedule, decide who to work with or be on an even footing with your boss. In some ways, you are taking on the obligations of a freelancer without enjoying the benefits.
Before you take this step, it’s important to weigh the advantages and disadvantages as they pertain to your individual situation.
- Is the salary being offered to you high enough to offset the extra costs?
- Is your US company offering you flexibility, such as work during Israeli hours or at any time you choose?
- Are your bosses bothered by your designation as a freelancer, since it weakens the employee/employer relationship?
Use an Employer of Record service
If freelancing seems like a bum deal to you, but you really do want to work with an American company, you can choose to be employed by an Employer of Record service such as Route 38.
In that scenario, your employer pays Route 38 monthly and Route 38 pays your salary in accordance with Israeli law. This is simple for your employer to set up, since Route 38 takes care of all the bureaucracy. It’s easy for you as well, since you get a pay stub (tlush maskoret) like any other Israeli employee, can get paid in shekels in Israel or dollars in the US and all necessary deductions (pension, health insurance and income tax) are withheld for you.
What is an Employer of Record (EOR) service?
An EOR is a company which takes on the responsibilities of employment for employees who are providing services for other businesses. In the case of Route 38, we employ people working in various fields, usually for companies based abroad. We provide our employees with an Israeli pay stub (tlush maskoret) and we deduct all the legally required deductions.
How is this different from a Professional Employment Organization (PEO)?
A PEO doesn’t take full responsibility, rather shares responsibility with another employer. This is a solution that only works if the hiring company has an entity in the relevant jurisdiction (in this case, Israel). This is a solution that works well for a company that has 5-10 employees in Israel, although their main office is abroad. It must cover all the employees belonging to that company in the country.
An EOR such as Route 38 takes full responsibilities for the employee. The company doesn’t have to have an entity here in Israel. It can cover some of the employees and doesn’t have to cover them all. There is no minimum number of employees, so this is a great solution for a business which wants to work with only one person in Israel. We take care of HR, taxes, payment terms, payroll funding, workers compensation and unemployment claims.
What are the associated costs?
There are registration and termination fees as well as a flat monthly processing fee. It’s best if you can get your US employer to cover these fees, otherwise it will be deducted from your salary.
Advantages of Working through Route 38
- Easy to get paid by employers abroad. We maintain a US bank account, so it’s easy for the employer to pay invoices. Your salary is then paid directly into your Israeli bank account. You don’t have to deal with the headache of exchange rates and change fees and they are automatically deducted from your salary.
- Simple for employers to navigate.
- No need to become an Israeli freelancer and deal with the effort and expense of reporting. The disadvantage of freelancing is that you are required to report your income annually or bi-monthly. Most freelancers find that this is complicated to do independently and hire an accountant or tax advisor to assist them with reporting. This is an added expense that comes off their salaries.
- Avoid self-employed status in the US and its consequences vis a vis Social Security payments. Self-employed Israelis who are also US citizens are required to deposit 15% of their salaries in Social Security.
- Office space. We maintain an office in Jerusalem, where our employees can come to work. Bring your laptop and enjoy our wifi, kitchen and friendly atmosphere. Book our conference room for meetings.
- Collaboration opportunities. Because we employ many different types of professionals, you can easily find colleagues to provide services that you need.
Is it legal? I heard that Bituach Leumi doesn’t like these companies.
In 2014, a key player in the industry in Israel was sued by Bituach Leumi, because its clients were paying lower Bituach Leumi fees as if they were employees, while acting as freelancers. The company lost the court case and had to change its business model as a result. Employer of Record companies which have been established since then follow the new business model which is in accordance with Bituach Leumi’s regulations.
Opening your own business
Another solution is to open your own Israeli company, called a Chevra Ba’am in Hebrew. In this situation, you become an employee of the company and are issued a regular Israeli pay stub. Accounting fees are higher than in the other options, because reporting income to the Israeli government is more complex. If your company is small, a freelance CFO can take care of all financial issues, but this is still a significant expense. The biggest advantage of creating a Chevra Ba’am is that you can scale your business and easily employ others to help you grow and expand.
Getting the right advice
The employment structure you choose will affect your finances as well as your relationship with your employer, so it’s important that you get the right advice in order to make an informed decision. One common mistake many olim make is consulting with an American CPA living in the United States about their finances in Israel. Because the average CPA is, understandably, unfamiliar with Israeli tax laws, their advice is often misguided and can lead to issues later on. The better choice is to consult with an American CPA living and working in Israel, who is an expert both in American and Israeli tax law. It is also possible to consult with a firm which employs both American and Israeli accountants, who work in collaboration with each other to give their clients the service they need.
We at Route 38 are extremely knowledgeable about tax law in both the US and Israel and we offer paid consultations to people who are trying to figure out how to structure their employment arrangement with an American employer. If relevant, we will suggest our Employer of Record service, but we will also tell you if this is not in your best interest, and you would be better off with a different type of arrangement. Book a consultation with us by emailing info@route38.co.il.