If you’re a US company, you generally can’t hire someone living in Israel as a W-2 employee, even if they’re doing the same kind of work you’d assign to someone in the States.
Here’s why:
W-2 employment only covers US-based workers
A W-2 means the worker is a US employee and you’re responsible for withholding taxes (Social Security, Medicare, federal and state income tax) and complying with US labor laws. But if that person lives and works in Israel, Israeli employment law applies instead. Technically, you’d need to register as an employer in Israel, withhold Israeli income tax, and make contributions to Bituach Leumi (Israel’s version of Social Security). That’s complex, expensive and often not worth it for a single remote hire.
It creates tax and compliance risk
If you issue a W-2 to someone abroad, you’re reporting the income incorrectly. Meanwhile, the Israeli Tax Authority could view your worker as your local employee, which could expose you to audits, back taxes and fines for not following Israeli labor regulations.
Social Security and benefits conflicts
As an American employer, you’d normally pay your half of the employee’s Social Security and Medicare. But there’s no totalization agreement between the US and Israel, so you could end up paying US contributions while your worker gets stuck also paying the equivalent Israeli ones.
You risk “permanent establishment” in Israel
If an employee is officially working for you in Israel, Israeli authorities might decide you have a taxable presence (“permanent establishment”) there, meaning your US company suddenly owes Israeli corporate taxes.
What to do instead
If you want to hire someone who lives in Israel, you can:
- Engage them as an independent contractor – They invoice you from Israel as a 1099, and you don’t withhold US payroll taxes. They open a freelance business in Israel and pay taxes and Bituach Leumi to the Israeli government, as well as Social Security to the US government.
- Use an Employer of Record service (EOR) – An EOR acts as the official employer of your worker and handles Israeli payroll and compliance on your behalf. They withhold Israeli taxes at the source and eliminate the need for the worker to pay Social Security (as he is not considered self-employed).
- Pay through an Israeli company – Your worker can set up a Chevra B’am (similar to an Ltd.) and bill you for the company’s services. This type of company comes with expensive accounting costs, so this is only lucrative for the worker if his income is on the higher end.
Hiring a resident of Israel on a W-2 isn’t illegal, but it opens up a world of tax, legal and compliance headaches. The simpler and safer path is to work through a local contractor or EOR. Contact us for more information on how an EOR can work for you and your worker.
