Question: I’ve been working for a few years as an employee here in Israel but I want to switch to freelancing for the added flexibility and the ability to choose my own clients. But I’m concerned because I’m an American citizen and I understand that it’s very expensive to be an Osek Murshe and I will end up owing taxes in both Israel and the US. Is there another solution I haven’t thought of?
Answer: Thank you for your question! Owning your own freelance business as an Osek Patur or Osek Murshe does in fact open you up to owing money to the US government. This is because when you file your US taxes, the government will charge you 15% Social Security as a self-employed person.
As a US citizen, you are required to file a US tax report if you have an income, regardless of whether you are employed or self-employed. As an Israeli, you generally will not owe taxes on earned income to the US government, due to the tax treaty between the two countries, according to which you are taxed first in your country of residence. However, Social Security is not included in this treaty. If you’re self-employed, you will be charged 15% Social Security, just like any other self-employed person in the US.
Paying into Social Security
This is not necessarily a bad thing. If you earn 40 Social Security credits you will be eligible to receive a monthly payout from the US government after you retire. Under current laws, you can receive this money even if you are living in Israel. Many retirees find this amount a welcome addition to their retirement funds.
On the other hand, you need to make a living right now. If the payments to Social Security, Israeli income tax and Bituach Leumi are too high to leave you much in your bank account at the end of the month, freelancing might not be the best idea.
Employer of Record service
But that doesn’t mean you should give up your dream of a flexible lifestyle and career. If freelancing is what you want, you can sign up with an Israeli Employer of Record service. Some of these companies specialize in employing freelancers who maintain creative control over their business, while getting an Israeli pay stub from the EOR service. You can still choose your clients and decide how much and when you want to work, but at the end of each month, the company will invoice your clients and pay you a salary according to the amount received from them.
Legality of EOR services
EOR services which comply with Israeli government requirements are perfectly legal and a good solution for many people. If you go this route, check that the company is compliant and that it has good customer service, so that you receive your salary in a timely fashion and get a quick response when you have a question or issue.