Every week I have variations of the same conversation with a prospective client making Aliyah. “I'm planning to work remotely from Bet Shemesh. Should I stay on my W-2 or switch to getting paid as a consultant and bill my employer as a contractor?”

Before the 2026 tax changes, the answer usually depended on a dozen factors and could go either way. After the changes, the answer is much clearer. For almost every income level below $300,000, W-2 wins decisively. And the reason is self-employment tax.

Let me show you exactly what the math looks like for a typical oleh earning $185,000 under the combined 2026 regime.

Key Points

  • The gap: At $185K income, W-2 saves approximately $11,000 per year vs LLC/1099 structure under the combined 2026 regime.
  • The reason: Self-employment tax is 15.3% of net earnings. W-2 FICA is 7.65% (employee portion). The other 7.65% is paid by the employer and doesn't show up as a cost to the employee.
  • The structural reality: Self-employment tax is the single largest cost that the new laws don't fix. Bituach Leumi is gone. Israeli income tax is gone. FEIE handles U.S. federal tax. SE tax remains, and it's 15.3% of everything up to the Social Security wage base.
  • The exceptions: An S-corp election can partially close the gap for incomes above $180K. For incomes under $100K, the LLC simplicity might still justify the higher cost.

Our Test Scenario

Let's use a specific example. A tech worker earning $185,000. Makes Aliyah in 2026 with his spouse and becomes a full Israeli resident before the end of 2026 and continues living here throughout 2027. Qualifies for both new Israeli laws. Meets the Form 2555 physical presence test. Lives in Bet Shemesh with housing costs around $36,000 per year. Owns less than 10 percent of their employer (not a material shareholder).

Two scenarios to compare for the 2027 year (it works similarly for 2026 but there are more nuances there). Scenario A: remains on W-2 with their existing U.S. employer. Scenario B: employer won't keep them on W-2, so they open a single-member LLC and bill the same dollar amount as a contractor.

The U.S. Federal Tax Side

For both scenarios, U.S. federal income tax is approximately zero. FEIE shelters $132,900. Housing exclusion adds roughly $23,000. Standard deduction adds $31,500. Total shelter is $187,400, which exceeds the gross income of $185,000.

Net federal income tax: zero in both scenarios.

So federal income tax is not where the structures differ. The difference shows up in payroll tax and SE tax.

Scenario A: W-2 Payroll Tax

Employee share of Social Security: 6.2% of wages up to the Social Security wage base ($176,100 for 2026). $176,100 × 6.2% = $10,918.

Employee share of Medicare: 1.45% of all wages. $185,000 × 1.45% = $2,683.

Additional Medicare: 0.9% on wages above $250,000 MFJ. Not applicable at this income level.

Total W-2 employee payroll tax: $13,601.

The employer separately pays another $13,601 in employer payroll taxes, but this doesn't come out of the employee's paycheck. From the employee's perspective, the visible cost is $13,601.

Scenario B: Schedule C Self-Employment Tax

Net self-employment (SE) earnings: 92.35% of net profit. $185,000 × 0.9235 = $170,848.

Social Security portion of SE tax: 12.4% of net SE earnings on that full $170,848 is $21,185.

Medicare portion of SE tax: 2.9% of all net SE earnings. $170,848 × 2.9% = $4,955.

Total self-employment tax: $26,140.

Half of this is deductible on the federal return, but because federal income tax is already at zero due to FEIE, the deduction doesn't generate any savings. The full $26,140 is out-of-pocket cost.

The Bottom Line

W-2 payroll tax cost: $13,601. LLC self-employment tax cost: $26,140.

Difference: $12,539.

That's just under $13,000 per year in pure cost difference, with no change in federal income tax, no change in Israeli income tax, no change in Bituach Leumi (zero under the February 2026 law either way), and no change in Mas Briut. The only variable that moved is SE tax vs FICA, and the gap is entirely the employer's portion of payroll taxes that W-2 workers never see.

Over the 5-year new oleh exemption window, that's approximately $62,000 of cumulative difference between the two structures for the same income at the same work.

Why Employers Sometimes Push Back

The obvious question is: if W-2 is so much better, why do employers ever convert an oleh to 1099 or refuse to keep them on payroll? The answer has to do with employer-side complications that the oleh doesn't see directly.

Employers who keep an employee on U.S. payroll while they work from Israel face several concerns. The biggest being that it may put the company at jeopardy of needing to file and pay taxes in Israel. However, that is no longer the case, since the new law gives the employer an exemption for those first 5 years as well. That makes the W-2 scenario a lot more appealing for both the employee and the employer.

When LLC Still Makes Sense

Not every situation favors the W-2 employee route. There can still be cases where an LLC can be the right answer.

First, if you have multiple clients and no employer-employee relationship is realistic, you're a contractor regardless and an LLC gives you liability protection and cleaner accounting.

Second, at very high income levels ($300,000+) an S-corp election (which requires an underlying LLC or corporation) can partially close the SE tax gap while preserving some of the contractor flexibility. While an S-corp can be a great tool, there are things to be aware of before going that route, so schedule a call.

Third, if you are coming from a state like New York or California, there are things to be aware of like the convenience of employer rules.

Another issue may be if you are also working privately with Israeli clients or an Israeli company. Then neither of these options may be the right fit, and there are others we can discuss.

If you are looking to make Aliyah and need assistance figuring out the best structure to save on your taxes, reach out. I speak with people regularly about it, and help them live their dream of moving to Israel while paying as little tax as possible.