Question: I’ve been working as a 1099 (independent contractor) for a company in the US and paying taxes in Israel as an Osek Murshe. Recently, an employee of this same company who wants to make aliyah started discussions about working through an Employer of Record service. Now my company is asking me if it’s better for them and for me to switch to getting paid through an EOR.
How an EOR benefits the American company
Your first question is about what the best way is for an American company to pay an Israeli. As you mentioned, there are two ways this can be done. A W-2 is not a good option, since that opens the entity to tax liability in Israel, so that leaves 1099 or EOR.
A 1099 is a perfectly legal solution for the company, but it has some disadvantages. Firstly, it creates a looser structure in which you are not an integral part of the company. Secondly, it requires you to pay 15% of your income to US Social Security (assuming you are an American citizen) and VAT (Value Added Tax) to the Israeli government, leading to your either asking for higher compensation or being resentful that their salary doesn’t adequately cover this payment.
An EOR, on the other hand, alleviates the need for Social Security payments and maintains a structure more similar to an employer-employee relationship. There is a fee to use these services, but it may very well be less expensive than Social Security payments. It allows both you and the business to see yourself as a part of the company and not an outside contractor, despite the fact that you are technically employed by the EOR.
How an EOR benefits the worker
As mentioned above, one big advantage of getting paid through an Employer of Record service is that you are not considered self-employed, so you are not required to pay US Social Security. Although paying into Social Security may seem like a good idea, since you will receive payments upon retirement, that’s only helpful if you can live on your salary after deducting Social Security as well as Bituach Leumi, income tax, pension and health tax (all required by Israeli law).
A second advantage of working through an EOR is that you don’t have the headache and expense of running a business. You don’t have to issue receipts or report your income to the government. You don’t have to pay VAT and you don’t need to hire an accountant to make sure you are compliant with bi-monthly reporting and Hatzharat Hon (a report of all your assets, required shortly after you open a business and approximately every 5 years thereafter).
Instead, the company you are working with pays what you are owed into a bank account owned by the EOR. The EOR issues you a salary and automatically deducts all legally required payments, so you receive only the net salary and don’t need to do any reporting or paying. There’s also no need for currency conversion, since that is dealt with by the EOR as well.
What’s the bottom line?
This is an important decision, and you don’t want to make it based on what you read online. Since there can be individual circumstances that affect the bottom line, it’s best to consult with experts in the field who will give you advice based on your income, the job you are doing, your age and other factors.
You are welcome to book a consultation with us (just email info@route38.co.il) and we promise to give you unbiased guidance and help in making the best choice for your career and financial success.