You are starting your own business in Israel, but you aren't sure how it is going to go. Maybe it is consulting on the side of your day job, maybe it is the start of something bigger. You ask around, and everyone tells you the same thing. Open an osek, it takes an hour, it is simple.

They are right. It is simple, unless you are a US citizen. The moment you open that tik, you have created an American tax problem that has nothing to do with Israel, does not care how much you earn, and will end up taking such an amount out of your side gig that it doesn't make sense to spend your time on it.

Two people illustrate this. One made Aliyah two years ago and is building a consulting practice. The other has lived in Israel since she was three and holds a US passport because her mother was born in New York. Their Israeli tax situations have almost nothing in common. Their American problem is identical.

Key Points

  • Self-employment tax, because there is no totalization agreement between the United States and Israel.
  • Osek zair and osek patur still need you to track real expenses.
  • Your mandatory Israeli pension may be a foreign trust or a PFIC.
  • US retirement plans do not fix it, because Israel does not recognize them.
  • Nobody advising you on the Israeli side is thinking about any of this.

I am going to walk through each of these, and then I am going to tell you why the situation is more fixable than it looks. Because it is. Sometimes. It just requires deciding something other than what everybody defaults to.

The 15.3% Most Israeli Born US Citizens Don't Realize

The United States and Israel have a tax treaty. What they do not have is a totalization agreement, which is the separate agreement that stops two countries from charging you social taxes on the same income. Roughly thirty countries have one with the US. Israel does not.

So the American atzmai in Israel pays Bituach Leumi and mas briut on the Israeli side, and self-employment tax at 15.3% on the American side, on the same income, for the same purpose. No credit, no election, no relief.

Many chime in at this point to say “I heard that you don't have to pay tax if you make less than $120,000.” However, that is wrong on multiple counts, including the amount now being above $130,000 for 2026 onwards. What they are referring to is the Foreign Earned Income Exclusion (FEIE), which does not help here. It excludes foreign earned income from US income tax. Self-employment tax is a different tax system, reported on the same tax forms, and is still due once your net earnings from self-employment reach $400.

This produces a result that sounds like a mistake but is not. Take an oleh with ₪300,000 of osek income. The FEIE covers all of it. His US income tax is zero. And he still owes the IRS roughly 15% of his net profit, in dollars, in a year the US taxed none of his income.

Simple in Israel, Complicated in America

Israel gives small businesses a genuine break. Osek zair and osek patur come with simplified reporting, minimal bookkeeping, and thresholds designed so that small operators are not buried in paperwork.

The IRS has no equivalent concept and does not recognize any of it. You file a full Schedule C. This means that you still need to track your expenses and know what can be deducted from your business income. Real books, real expense categories, depreciation on the laptop, business use percentages on the car and the home office.

So the person who chose the simplified Israeli track specifically to avoid administrative burden now has more bookkeeping than they would have had otherwise, because they have to maintain American-standard records regardless of what Israel asks for.

The Pension That Punishes You for Saving

Israeli law requires atzmaim to contribute to a pension. This is not optional and it is not a planning choice.

On the American side, the treatment depends on the specific vehicle. The common outcomes are not good ones. The pension may be treated as a foreign grantor trust, which brings Form 3520 and Form 3520-A and penalties out of all proportion to the amounts involved. Or, on the more prevalent understanding, while not a foreign grantor trust, the pension investment of a self-employed person in Israel is still a PFIC. That ends up with tedious annual filings, and harsh taxes upon retirement.

What most people don't realize is that the penalty for not putting money into a pension is around ₪500 per year at most. Not really something to take as a serious requirement, but that doesn't mean people don't want to invest in their pensions. Some want to put further money into a keren hishtalmut, which has similar problems for atzmaim.

Why the Obvious Fix Is Not One

At this point the natural thought is to save through an American vehicle instead. Open a SEP or a solo 401(k), take the US deduction, sidestep the whole foreign trust question. It does not work as cleanly as it should.

A US retirement plan is deductible in America and largely invisible in Israel. Israel does not recognize the deferral, so the contribution doesn't reduce Israeli taxes in any way. Then when you take the money out again, the US will tax you. Further, the growth inside the IRA or 401(k) may still be taxable for Israeli purposes again when coming out of the fund.

If you are feeling stuck reading this, that is the correct response. This is the point where most people stop reading and hope it goes away.

Here Is What Actually Helps

The problem is not that there is no answer. The answer may just depend on your specific situation and how to best go about it.

For people who made Aliyah in the past 5 years, there may be a way to exempt it from Bituach Leumi in Israel. For those who made Aliyah longer than that, but serve US clients only, maybe an LLC will save the day. If you are working for one major client, maybe a PEO or a tax position is the way to go to avoid double taxation.

At lower income, it may not make sense to do anything further than the above. At higher income levels, maybe incorporating changes the picture. You will have other complicated filings, but that is what your US and Israeli accountants are for. Your US CPA should be one who is familiar with Form 5471 and how to avoid double taxation. That is where Y2J comes in should you need help.

In the middle is where the review belongs. There is a point where the annual self-employment tax exceeds the cost of running a company and filing the forms that come with it. That crossover depends on your margins, your expenses, and your appetite for administration, and it is worth actually calculating rather than guessing. We can help you weigh your options here and make the smart decision.

There is one more layer for recent olim. The new Israeli earned income exemption and Bituach Leumi exemptions are a golden opportunity. For someone who qualifies, Israeli tax on the business may drop to zero, which means the American bill becomes the only bill and the entire planning question inverts. If that is you, the analysis above changes considerably.

One Thing to Do Before Any of This

If you have been in Israel a long time and your American filing has been patchy, structure is the wrong place to start. There is no point optimizing an entity when six years of returns were never filed and the kupat gemel you have held since you were twenty-two carries decades of unreported PFIC exposure. Fix the history first. The structure conversation is much shorter once there is a clean record behind it.

For a lot of people in that position, the trigger is not a tax question at all. It is the bank asking them to sign a W-9. And one practical warning. Your basis records almost certainly do not exist. Nobody who grew up in Israel tracked the dollar cost of anything, because there was never a reason to.

Your Next Step

Being self-employed in Israel as an American is not a terrible idea. It is a terrible idea to do it without knowing what you signed up for, and it is a worse idea to make the decision once and never revisit it. The structure that fits at ₪30,000 is not the one to use at ₪200,000. The structure at ₪200,000 is wrong at ₪800,000. The structure that worked for your friend who just made Aliyah does not necessarily apply to you if you have grown up here.

When was the last time you looked at the structure you set up when you opened your tik? Whether that was last year or in 2003, it may be worth a second look. If you need help, reach out to Y2J.

This article is general information, not tax advice for your situation. The right structure depends on your income, your clients, your residency history, and your filing record. Please speak with your own accountant or CPA before acting on any of it.