Many self-employed individuals report that income tax takes a significant portion of their earnings. In some cases, this burden is so substantial that they struggle to make ends meet. This issue is particularly relevant for U.S. citizens living in Israel, where tax rates for the self-employed are relatively high.
Beyond income tax, self-employed individuals in Israel must also pay National Insurance (Bituach Leumi) contributions. However, dual U.S.-Israeli citizens face an additional challenge—they are subject to self-employment tax in the United States as well.
This article explains what self-employment tax is, who must pay it, and how it interacts with Israeli taxation, including potential strategies to mitigate double taxation.
The U.S. Self-Employment Tax
Self-employment tax is an additional tax imposed on self-employed individuals, separate from income tax.
The 15.3% self-employment tax in the U.S. funds Social Security and Medicare, similar to Israel’s National Insurance contributions.
For salaried employees, this tax is split between the employer and employee and deducted automatically from wages. However, self-employed individuals must pay the full amount themselves—both the employer and employee portions.
Who Must Pay Self-Employment Tax?
U.S. tax law is based on citizenship and residency, meaning:
- U.S. citizens and permanent residents (green card holders) must file U.S. taxes on their worldwide income—regardless of where they live.
- This applies even if they have never lived in the U.S. or earn their income solely in Israel.
For self-employed individuals, the threshold for filing is only $400 in annual net earnings. This means:
- Any U.S. citizen or green card holder earning over $400 per year from self-employment must file a U.S. tax return and pay self-employment tax—even if they do not reside or work in the U.S.
Can You Be Required to Pay Self-Employment Tax Twice?
In short—yes.
While the U.S. and Israel have a tax treaty to prevent double taxation, this treaty does not cover self-employment tax.
Double Taxation in Practice
Typically, under the treaty:
- Income tax is primarily paid in the country with the higher tax rate.
- The taxpayer receives a credit in the U.S. for Israeli taxes paid, ensuring they don’t pay full income tax to both countries.
However, self-employment tax is different. Because it funds Social Security, and social security contributions are not covered by the U.S.-Israel tax treaty, dual citizens must pay both:
- Israeli National Insurance (Bituach Leumi) contributions
- U.S. self-employment tax (15.3%)
This effectively results in double taxation on self-employment income unless specific tax planning strategies are used.
How to Reduce or Avoid Double Taxation
While the tax treaty does not exempt self-employed individuals from double taxation, there are potential strategies to reduce or eliminate this burden:
1. Proper Classification of Income
- Some self-employed individuals in Israel restructure their business to receive income as salary from an Israeli corporation instead of self-employment earnings.
- This approach may eliminate U.S. self-employment tax while maintaining Israeli tax compliance.
2. Claiming Foreign Tax Credits
- The Foreign Tax Credit (FTC) allows U.S. taxpayers to offset U.S. income tax with Israeli taxes paid.
- However, FTC does not apply to self-employment tax—it only helps with income tax.
3. Treaty-Based Return Position (Form 8833)
- Some dual citizens may use Form 8833 to claim an exemption from self-employment tax based on international tax principles.
- This approach requires careful documentation and legal guidance.
4. U.S. Social Security Agreements (Totalization Agreements)
- The U.S. has agreements with many countries to prevent double social security taxation.
- However, Israel has not signed such an agreement, meaning no automatic exemption exists.
5. Expert Tax Planning
- Given the complexity of these laws, consulting a U.S. tax advisor in Israel is strongly recommended.
- A tax professional can assess whether exemptions or restructuring options apply to your specific situation.
Final Thoughts
For dual U.S.-Israeli citizens, self-employment tax can create a significant financial burden. While tax treaties prevent double taxation on income tax, they do not apply to social security contributions, leading to double self-employment taxation.
However, careful tax planning, proper classification of income, and expert guidance can often help reduce or eliminate unnecessary tax liabilities.
For personalized assistance, consulting a tax professional familiar with both U.S. and Israeli tax laws is highly recommended.
