I work as a software developer for an American company with no Israeli office or subsidiary. If that is not your case, what follows probably doesn’t apply to you.
TL;DR If you make significant money, you need to be an employee of an Israeli company – one way or the other. This is because of American Social Security, not Israel.
I started the worst way – atzma’i (independent contractor). I was paying 15% for American Social Security, about 17% for Bituach Leumi and about 7% for Israeli income tax. Fortunately, if all your clients are overseas, there is no VAT (מע”מ).
There are 3 ways to become an employee and avoid paying American Social Security:
- Start your own company. You’ll need an Israeli accountant for that.
- Join an existing company. I did this with a friend who set up his own company because he was also working remotely for the US. It helps us both defray the cost.
- Get one of the payroll companies to handle it. Yeul Sachir and Route38 are the two I know of. Accountants and lawyers will warn you off of them, telling you that their legal status is in question, but they’ve been around for years, and they’re not in hiding. The legal status of taxation of American IRA’s and 401K’s are also “in question” (a different issue, which I may address sometime). I live in Ma’ale Adumim, a city of 40,000 people whose legal status is “in question”. “In question” is a far cry from “illegal”, especially in Israel.
All of the options are expensive, but less expensive if you’re making significant money. American Social Security is 15%, it’ll cost you about half that for any of these options.
If you have worked more than 40 quarters (10 years) in the US, you will get Social Security. In fact, by a fluke of the treaty, your Social Security won’t be taxed by America or Israel, if you made aliyah and live here! If you keep paying into it, you’ll get more, but you’ll make far more if you don’t pay (legally, of course) and invest the money in a broad index fund in a low-cost Roth IRA. I believe that’s true even if you’ve worked less than 10 years in the US.
In case it crossed your mind: if your company keep you as a regular employee, my understanding is that you make them an Israeli company, which opens up a whole new can of worms for them.
On your American taxes, you’ll use the foreign income exemption and probably have 0 taxable income – assuming you’re living here full time. I did TurboTax the first year and then switched to an accountant, because I had other questions. One financial advisor suggested using an American accountant, so you always have someone else to blame. I thought that might be good advice.
For Israeli taxes, you won’t need an accountant as an Israeli employee. They don’t require everyone to do a return. If you’re running your own business, of course you’ll need an accountant to run it and they’ll take care of it.
At first, I thought it’d be nice to have one accountant to do both Israeli and American taxes. I hired such a firm, but was highly unsatisfied. The guy in charge was pretty good, but it is a large firm, with separate departments for Israeli and American taxes. The departments didn’t talk to each other and often didn’t communicate within one department. In one case, they didn’t tell me to pay my American estimated tax until it was already late. There do exist such individuals, but I had trouble finding them, and learned to live without.
Every Israeli Facebook group I’ve ever seen says “get a lawyer” for everything, no matter what the subject. I think they suggest a lawyer even if you just want to know the weather. I’ve been here nearly 3 years and never hired a lawyer. Still not in jail 😉
Disclaimer: I am not a lawyer, nor an accountant. This is what I’ve found out from my own experience. I am trying to make what I’ve learned as widely available as possible to help new and potential olim have as good an experience as I have.