US Citizens in Israel: Save 15.3% Self-Employment Tax — The Short Answer
US citizens living in Israel who work as self-employed freelancers pay 15.3% Self-Employment (SE) Tax (Social Security 12.4% + Medicare 2.9%) on top of regular income taxes — a $7,650 hit on $50K income. By working through NETO as an Israeli employee (W-2 equivalent with payslip and Israeli Bituach Leumi contributions), your earnings become wage income rather than self-employment income — exempt from US SE Tax under the US-Israel Social Security Totalization Agreement. NETO holds Israeli Manpower Contractor License #1565, charges 5%, and handles all payroll, NII, pension, and severance compliance. This is a clean, legal structure — but always verify with a US tax CPA before changing your filing.
Licensed Israeli Manpower Contractor — License #1565, Ministry of Labor & Social Affairs. Verify on gov.il. Court-approved settlement Sep 2022 — exclusive regulatory standing.
US Citizens Israel Self-Employment Tax: Save $7K+/Year with NETO
A practical guide for US citizens (and Green Card holders) living in Israel — how the right employment structure saves you 15.3% in US Self-Employment Tax legally, every year.
Already work freelance from Israel? Switch to a NETO Israeli payslip and reclaim 15.3%.
The 15.3% Tax Math (Real Numbers)
If you're a US citizen working as עצמאי / freelancer in Israel and reporting that income to the IRS, here is exactly what 15.3% means:
Numbers reflect 15.3% combined SE Tax: 12.4% Social Security (capped at ~$168K wage base in 2024) + 2.9% Medicare (no cap, plus 0.9% Additional Medicare Tax above $200K filing single). Net of the 50% deductible portion for income tax purposes.
Why This Works: US-Israel Totalization Agreement
The legal mechanism is the United States-Israel Social Security Totalization Agreement, in effect since 1995. It addresses the exact problem: which country gets the Social Security taxes when a person works across borders?
The rule (simplified):
- If you work as an employee for an Israeli employer (or an Israeli payroll provider like NETO), Israeli Bituach Leumi (National Insurance) contributions count — and you are exempt from US Social Security and Medicare taxes on that wage income.
- If you work as a self-employed person (עצמאי), you are generally responsible for SE Tax in the country where you reside — but the agreement still applies for true wage employees.
When you work through NETO, the legal structure is unambiguous: NETO is the Israeli employer of record, you receive a tlush sachar (Israeli payslip), NII is paid on your wages, and the income is reported on your 1040 as wages — not on Schedule C/SE. The Totalization Agreement exemption applies.
How to Switch — 4 Practical Steps
- Register at neto.live (5 minutes) — choose the freelancer/employee track.
- Your foreign client pays NETO in USD (or EUR/GBP/ILS). NETO issues an English tax invoice to the client with VAT 0% (export of services).
- NETO pays you a tlush sachar in ILS, after deducting Israeli payroll taxes (income tax, Bituach Leumi, health tax, pension if requested). 5% NETO commission.
- You report on US Form 1040 as wage income (Line 1) — not Schedule C. Claim Foreign Tax Credit (Form 1116) for Israeli taxes paid. No Schedule SE.
⚠️ CPA verification: US tax law is complex. Before changing your filing structure, verify with a US-licensed CPA familiar with expat taxes (Israel desk). The Totalization Agreement exemption is well-established but your specific case may have nuances (Green Card holders, dual citizens, multi-source income).
Freelancer vs NETO Employee: Side-by-Side
FAQ
Does this work for Green Card holders too?
Yes — the Totalization Agreement applies to anyone subject to US tax law on worldwide income, which includes Green Card holders. The same wage-vs-self-employment distinction applies. Verify with a CPA.
What about Israeli income tax? Will it be higher?
Israeli employee income tax brackets are similar to (often slightly lower than) self-employed brackets for the same income, after standard deductions and credits (Nekudot Zikui). Most US citizens see neutral or favorable Israeli tax outcomes, while saving 15.3% on the US side.
Do I lose Social Security credits in the US?
Under the Totalization Agreement, Israeli Bituach Leumi credits can be counted toward US Social Security eligibility if you ever need to combine them (typically when you don't have enough US credits). For most people who plan to stay in Israel long-term, the Israeli pension system is more relevant.
What if I have a US LLC?
Single-member LLCs are typically disregarded entities for US tax — same SE Tax treatment as direct freelance. The NETO solution still applies: be the Israeli employee of NETO instead of the LLC's contractor. Multi-member LLCs need CPA review.
Can my US client pay NETO directly?
Yes. NETO issues a proper US-format invoice (English, USD or other currency, VAT 0% line for export of services). Your client pays NETO, NETO pays you on Israeli payslip after handling Israeli payroll obligations.
Stop paying $7K+/year in SE Tax. Start with NETO.
Licensed Israeli Manpower Contractor #1565. Court-approved status (Sep 2022). 5% commission. Setup in 5 minutes.
Yizhar Cohen
CEO & Founder, NETO — Licensed Israeli Manpower Contractor #1565
25+ years building employment platforms in Israel. LinkedIn · About NETO
