U.S Social Security for U.S Citizens Living Abroad

The United States, like Israel and many other countries, enacted a Social Security Act that states that U.S workers must pay social security tax.
In exchange for these payments, the insured are entitled to benefits and services from Social Security, such as: unemployment, maternity leave, disability benefits, survivor’s benefits, retirement benefits and more.

Retirement benefits could be received as early as at the age of 62, while the older you are, the higher the monthly payments.
In exchange for health insurance payments, the insured will be entitled to free medical insurance from the age of 65.

It should be noted that to be eligible for Social Security retirement benefits, a worker must have accumulated at least 40 quarters of work in “covered employment”, namely 10 years of payments that do not have to be consecutive.

The U.S Social Security is divided into two:

1.  Social Security

2. Medicare

Social security and health insurance payments

Employer/Employee

As of today, a U.S. citizen living in the U.S. who is employed by an individual or company, is required to set aside 15.3% of his salary for Social Security and health insurance.
Half this provision is covered by the employee, and the other half is covered by the employer.
Each party sets aside 7.65% that consist of 6.2% for social security and 1.45% for health insurance.

However, social security payments for the year 2024 are currently capped at $168,600.
Which it to say that any sum exceeding that cap will be directed to cover health insurance only.

Social Security and Health Insurance – Self-Employed Individuals

An unincorporated self-employed individual (a sole proprietor), such as an Osek Patur or Osek Murshe in Israel, pays social security as an employer, i.e. 15.3% of the business’s annual net profit above $400.

Rights and Obligations of U.S Citizens in Israel

A U.S citizen who lives in Israel and owns a business defined as an Osek Patur or Osek Murshe, is also liable for paying into U.S. Social Security in the U.S on the business’s net profits, even if he has already paid the 16% Israeli National Insurance tax.
Namely – he must pay another 15.3% of the business’s net profit to the U.S authorities.

On the other hand, a U.S citizen who is employed by a foreign (non U.S) corporation or individual – is not liable to pay into U.S Social Security.
This is cause for extreme frustration since other than retirement benefits from the age of 62, this individual doesn’t have the right to any other benefit, including to U.S health insurance from the age of 65, since he does not live in the United States.

Exception to the Income Tax Treaty and the Totalization Agreement

The U.S – Israel Income Tax Treaty regulates many tax issues between these two countries, however this treaty does not include an arrangement between the U.S and Israel regarding Social Security or Bituach Leumi taxes, resulting in double taxation on declared earnings of U.S sole proprietors in Israel.
Such an agreement is called a Totalization Agreement, and the U.S has such an agreement with many countries around the world – but not with Israel.
Such an agreement would have recognized payments to Israel’s Bituach Leumi, and exempted a self-employed U.S citizen from paying Social Security in the U.S as long as he lives in Israel all year round.
We should note that under such an agreement, the U.S is obligated to pay benefits to those insured even if they do not reside in the U.S, as it does with individuals residing in the countries with which it has such an agreement, but the U.S requires reciprocity in most cases.
Meaning that the other country signed on such an agreement must also pay benefits to its citizens living in the U.S. At the moment, an Israeli citizen who does not reside in Israel is not entitled to receive any benefits from the Israeli National Insurance including old-age insurance, therefore Israel isn’t eager to enter into such an agreement.

To Pay or Not to Pay?

The advantage of paying U.S Social Security is that the payer accumulates rights, and by paying Social Security for 40 quarters, meaning ten years, you will be eligible to receive Social Security and health insurance benefits and all that this entails.
As aforesaid, the only way for a U.S citizen working in Israel to avoid paying Social Security taxes in the U.S, is by beeing employed by a foreign corporation or individual.
Many U.S citizens choose to be incorporated as a foreign corporation – i.e. an Israeli company, and thus receive a salary that is exempt from Social Security tax in the U.S. On the other hand, one should take into consideration that the legal and accounting costs of holding a company in Israel are much higher than the legal and accounting costs of an Osek Patur or Osek Murshe.
Therefore it is crucial that skilled and experienced professionals who are closely familiar with this matter carefully examine each case on its merits alone, to get the best advice tailored to each individual U.S citizen living in Israel.

A U.S CPA that works for you

Our firm has expertise regarding all aspects of U.S taxation, and certainly specializes in U.S Social Security and its tax implications on U.S citizens living in Israel.
Our firm’s advantage and added value is that we can handle all of our client’s needs from A to Z in all matters concerning the United-States, while connecting him with an Israeli CPA firm, his own or a firm recommended by us.
Our firm works closely with an Israeli CPA firm with an American and international orientation.
As a result, we save our client the need to run around between two separate firms and two different countries, providing a “one-stop-shop” that handles all his needs.

For further details, please contact our offices and we will be happy to assist you.

• This article uses the masculine form, but is of course addressed to all genders equally and without difference.{2]
• The above is not intended to convey or constitute tax advice or an opinion on any matter.{2]
• The above should not be applied in any manner to evade or defeat any penalty that may be imposed by the IRS or any other legal authority in the U.S or the payment thereof.{2]