TL;DR: The Double-Taxation Dilemma
For American freelancers living and working in Israel, the tax landscape can be complex and costly. The core issue is that you are required to pay social security taxes to both the United States and Israel on the same self-employment income. This happens because there is no totalization agreement between the two countries to prevent this double-dip. The combined tax burden can exceed 30% of your income, making it a significant financial challenge. This guide will break down the specifics of this issue and offer insights into how to navigate it.
The Heart of the Matter: Double Social Security Payments
When you work as a freelancer in Israel, you are considered self-employed by both the US and Israeli tax authorities. This means you are subject to social security taxes in both countries.
US Self-Employment Tax
The US imposes a self-employment tax of 15.3% on your net earnings. This is broken down into:
- 12.4% for Social Security (up to an annual income limit of $168,600 in 2024) 1
- 2.9% for Medicare (with no income limit)
Israeli National Insurance (Bituach Leumi)
In Israel, you are required to pay National Insurance contributions (Bituach Leumi) as a self-employed individual. The rates are progressive and depend on your income level. As of 2025, the rates are as follows:
Income Bracket | National Insurance Rate | Health Insurance Rate | Total Rate |
Up to 60% of average wage (NIS 7,522/month) | 4.47% | 5.17% | 9.64% |
Above 60% of average wage | 12.83% | 5.17% | 18.00% |
Source: Israeli National Insurance Institute (Bituach Leumi) 2
As you can see, for higher earners, the combined social security tax burden from both countries can reach 33.3% (15.3% to the US and 18% to Israel).
Why Does This Double Taxation Exist?
The primary reason for this double taxation is the absence of a Totalization Agreement between the United States and Israel. These agreements are designed to relieve US citizens of dual social security taxation when they work in a foreign country. While Israel has comprehensive social security conventions with 20 other countries, including the UK, Canada, and Germany, it does not have one with the US. 3
What is a Totalization Agreement? A Totalization Agreement is a bilateral agreement between two countries to coordinate social security coverage and benefits for individuals who have worked in both countries. A key feature of these agreements is to exempt workers from paying social security taxes to both countries on the same earnings.
The Pension Puzzle: An Added Layer of Complexity
To add another layer to this financial puzzle, Israeli law mandates that self-employed individuals contribute to a local pension fund. While this is a prudent step for retirement planning, it can create tax complications for US citizens. The IRS often classifies these Israeli pension funds as Passive Foreign Investment Companies (PFICs), which can lead to complex and costly reporting requirements on your US tax return.
Key Takeaways for American Freelancers in Israel
- Be Prepared for Double Taxation: Understand that you will be paying social security taxes to both the US and Israel.
- Know the Rates: Familiarize yourself with the current US self-employment tax rates and the progressive Israeli National Insurance rates.
- Factor it into Your Financial Planning: The combined tax burden is significant, so it’s crucial to account for it in your pricing and budgeting.
- Seek Professional Advice: The US-Israel tax landscape is complex. Consulting with a tax professional who specializes in expat and cross-border tax issues is highly recommended.
- Consider an EoR Employment Model: CWS Israel offers freelancers (US Citizens and Israeli alike) the option of continuing their freelancing / self employed engagement, while providing the employment umbrella to remove compliance risks, administrative burden, and keep more money in your pocket. Read more…
