Category: Resources for Employers Outside of Israel

An American company employing Israelis is no longer the rarity it once was. Israelis living and working in the US often want to hire other Israelis. Many companies want to support immigrants and native Israelis. And other companies don’t want to lose good employees when they move to Israel.

Remote work has become the norm around the world and Israel is no exception. This makes it easier for Israelis to accept jobs that are based abroad or bring their job with them when they make the move. So, how can your US company hire Israeli employees?

If your employee is currently working on a W-2 basis, you will likely want to change this. Employing someone with a W-2 requires your company to open a tax file in Israel and brings with it various tax obligations you probably don’t want to deal with. 

If your worker is working as a 1099 (independent contractor) or can switch to 1099, your company will not have to open a tax file in Israel. As a 1099, your employee will be responsible for paying Israeli taxes and Israeli Social Security, as well as any tax obligations in the US. 

In order to be compliant with Israeli taxes, your worker may register as a freelancer in Israel.

The disadvantages are that if your employee wants to be paid in shekels, you will need to deal with international wire transfers and their accompanying fees. Additionally, being self-employed in Israel means that your employee will have to pay 15% Social Security in the United States. This can be a big burden, on top of paying Bituach Leumi (National Insurance)  in Israel, so this is not necessarily the best deal for your employee.

Enter Employer of Record services. EOR companies make employing Israelis a piece of cake. Your employee becomes an employee of the Israeli EOR company and you are billed by them for consulting services. They will send you an invoice each month and you transfer payment to them (in some cases, directly into their American bank account). They then pay the employee, withdrawing taxes and other payments as necessary.

This process is easy to set up and maintain from your perspective. There is a registration and termination fee, as well as a monthly fee, but this is a small price to pay for a happy employee, and likely less expensive than giving your employee a raise to cover all their new expenses as a freelancer.

At Route 38, we specialize in providing EOR services for Israelis working anywhere in the world, and we work with hundreds of US companies paying for consulting services in Israel. We are experts in US and Israeli tax obligations and will guide you and your employee on how to best structure your employment arrangement. Email us at info@route38.co.il to set up a consultation and get personalized advice.

As telecommuting has become more prevalent around the world, more American companies have begun to hire people in Israel to join their staff. There are four main reasons why companies choose to do this.

Tapping into Israeli talent

Israel is called the Start Up Nation because of the ingenuity and talent of its best and brightest. Many Israelis have learned specialized skills during their army service and have been taught to think out of the box and dream big. Companies looking for exceptional talent will often find it in Israel. This is especially true in the hi-tech industry but by no means limited to it.

Savings on salary

Israeli salaries tend to be slightly lower than American ones, so it can sometimes be less expensive to hire someone in Israel to do the same job. Of course, salary is very much dependent on industry and experience, and not every Israeli will work for a lower salary than his or her American counterpart.

Night workers

Certain industries, such as medicine and customer support, require staff to work overnight. Israel is 7 hours ahead of the US, so an Israeli employee can provide services during his daylight hours while his American colleagues get a good night’s sleep.

For instance, JTA reported that Dr. Warren Isakow, an intensive care physician, works from 4 AM to 4 PM Israel time for hospitals around the US. Using software developed for this purpose, he directs procedures from his home office in Modiin, Israel, half a world away.

Existing employees

Another reason that American companies employ Israeli workers is that they had an excellent employee who wanted to move to Israel and they didn’t want to lose him or her. Instead of giving up on an outstanding asset, searching for and training someone new, they prefer to switch to a remote work arrangement with their current staff member. This arrangement is often mutually beneficial to both employer and employee and can last for many years.

Outsourcing to Israel has all the advantages listed above but it also comes with challenges. These are some of the issues to consider:

Employer’s obligation to the Israeli government

An American company hiring an Israeli must take into consideration that the Israeli government may call this an Israeli office and tax the company accordingly. Some companies solve this by having the employee set himself up as an independent contractor or business owner in Israel, with the American company billed as a client.

Employee’s obligations to the Israeli government

An arrangement where the employee becomes an independent contractor is beneficial to the American company, but it comes with serious drawbacks for the employee. This is because American citizens residing outside of the US are still obligated to file taxes and will have to pay 15% Social Security as independent contractors. Many dual citizens will balk at this arrangement and prefer to work for an Israeli employer in order to avoid these payments. 

A less expensive and more efficient solution to this problem is to hire Route 38 to provide services to the American company. A dual citizen wishing to work for this company becomes an employee of Route 38, which pays his salary and deducts all the taxes and payments required by the Israeli government. This is a win-win, because the employee doesn’t owe Social Security to the US government and has a smoother transition into Israeli life, while the American company doesn’t have to open an entity in Israel, with all its implications.

Communication challenges

Remote work is a different animal than office work. Particularly at the beginning, it may be difficult to communicate effectively in order to get things done efficiently and well. This problem is exacerbated by the time difference. Luckily, technology has advanced enough that task management software, virtual meeting platforms and social media make it easier to stay in touch. The 7-10 hour time difference does allow for some overlap between American and Israeli work hours, and Israelis are often flexible with their schedules in order to accommodate their overseas colleagues.

Is outsourcing to Israel a good idea? If the last few years have taught us anything, it’s that agility and flexibility are key to a successful business. If a company can tap into new talent pools, save money, cover nighttime hours or keep a good employee, outsourcing to Israel is certainly an excellent option.

The change in lifestyle and culture that the pandemic has brought to the world has brought much chaos and challenge to the world. But change also creates opportunity. One such opportunity that now exists is for employees to follow their dreams and move to locales never before possible while continuing to work remotely and provide even better service to their employers with a  balanced work/life model that fits their needs and keeps them satisfied and eager to prove themselves. Working remotely from Israel with a 7-10 hour time difference to the States has now become acceptable and brings about a preferred lifestyle for many.

If your employee would like to move to Israel, there are three ways that this can be accomplished.

The first option is that the employee continues to work for their US employers as a W-2. This option would require the employer to open a tax file in Israel – not a highly recommended course of action for any company who does not want to create nexus in a foreign country.

The second and more feasible option is for your employee to open a personal tax file as an independent contractor, requiring the service provider to hire an accountant to open the files with the relevant authorities and file an annual return, along with a small handful of other possible other reporting obligations. It’s pretty straightforward and may not take much time, but it can still be a burden on your employee. The financial downside to this approach for Americans is that, as they are reporting as an independent contractor, they will be required to report as such in the US as well, kicking in a 15% flat Social Security tax, that is not covered by the US-Israeli tax treaty, nor can any deductions be taken. Your employee may very well be reluctant to choose this option, due to the burden of reporting in Israel and paying Social Security in both countries.

The third way to continue to employ an Israeli resident is through our payroll service. Our service allows your employee to continue to work for you, but as an employee of our company, Route 38 Professional Services LTD. The benefits are that we take care of all of their accounting requirements here in Israel, helping them to continue to work seamlessly with you. Additionally, as an employee of our company (even though it is a foreign company) when the individual files their US return, they will no longer be liable for the Social Security tax. 

Our association with your organization will be through our US company, Route 38 LLC. This allows us to have a completely domestic relationship and act as a straight 1099. We invoice on a monthly basis and you can pay us via our BOA account using most electronic means. 

A brief run-down on mandatory Israeli employer costs might give you some reference point on the cost of employing someone in Israel. They are as follows:

 – National insurance  – approximately 7%-9% of gross salary

 – Pension – 6.5% of gross salary

 – Severance – 8.33% of gross salary

There are also a couple of optional benefit options, primarily a study fund benefit in which you could add an additional 7.5% of gross salary for funds to be deposited in an investment vehicle that can be tapped into after 6 years. 

You should also be aware of certain differences in employment law in Israel versus the US – specifically protections for employees for termination (a hearing needs to be proposed and happen and only after that can an up to 30 day notice period start) and maternity (pregnant women can almost never be terminated, job must be available upon return from leave and employer cannot start the termination process with the employee for at least 60 days upon return.) 

If there is any other information that we can provide, feel free to reach out to us at Route 38: info@route38.co.il. We look forward to hearing from you.