Question: Our wonderful employee has just let us know that he is moving to Israel at the end of the year. We don’t want to lose him, so we suggested that he become an independent contractor (1099) and continue working for us that way. He’s not thrilled with that solution, and we want to understand why.
Answer: According to Israeli law, an Israeli citizen with a job must either be an employee or a business owner. If your former employee becomes an independent contractor, he will have to open a small business in Israel and bill your company for services through that business. This type of arrangement has a number of disadvantages.
Accounting expenses
Small businesses in Israel come with various accounting expenses, such as invoicing software, reporting and declarations of assets. When the business serves multiple clients, there’s a logic to incurring all these expenses. But when the business exists only to serve one client (you), these expenses are an extra burden.
US Social Security burden
The US government requires that dual citizens residing outside the country continue to file taxes and pay them under certain circumstances. Only very high earners will be liable for US income tax, but this is not the case for Social Security. Every self-employed citizen is required to pay 15% of their income to SS, even if they are expats. Once your employee becomes an independent contractor, he will have to pay SS, and this is a big burden on top of paying Israel’s National Insurance (called Bituach Leumi), as well as Israeli income tax, health tax and accounting expenses.
Psychological factors
The relationship between independent contractors and companies is a weaker one than between employer and employee. Your employee may feel that he is being “demoted” by switching to 1099, and that he will not be treated as, or feel like, an integral member of the staff once he switches statuses.
The solution
Since you can’t continue to employ someone as a W-2 once he moves to Israel without tax liability, and it’s not in your employee’s best interest to switch to 1099, an Employer of Record service is the way to go. Your former employee becomes an employee of the EOR, avoiding the need to pay accounting expenses or Social Security. You retain the flavor of the employee/employer relationship without the legal definition, which contributes to better collaboration and a smoother workflow.
By using an Employer of Record like Route 38, you get the best of both worlds: your team member stays fully onboard, protected under Israeli law, and you avoid the headaches of entity setup, double taxation and administrative chaos.
