Running a Business in Israel as an American: What You Need to Report in Israel and in the US
If you are a US citizen or green-card holder with a business or freelance practice in Israel, you sit in two tax systems at once. Israel taxes what you earn here. The United States taxes your worldwide income, even when you live abroad. This article covers Israeli registration in practical terms and the main US reporting items at a high level.
Disclaimer: This is general information based on public guidance from the Israel Tax Authority, Bituach Leumi, the IRS, FinCEN, and the US Social Security Administration. It is not personal tax, legal, or accounting advice. Rules and thresholds change. Shmulik Grunberg, CPA (Israeli licensed accountant) advises on the Israeli side and coordinates with your US tax preparer. He is not a US enrolled agent or a US CPA and does not prepare US returns as a US practitioner.
First: register the business in Israel
Most freelancers and small businesses register with three bodies: VAT (Ma’am), Income Tax, and National Insurance (Bituach Leumi).
Osek patur or osek murshe?
- Osek patur (exempt dealer): For a small business whose annual turnover (sales before expenses—not profit) is not expected to exceed the ceiling. Per the Israel Tax Authority, for 2026 that ceiling is ₪122,833. An osek patur generally does not charge VAT and files an annual turnover declaration. Some professions (for example lawyers and accountants) cannot be osek patur regardless of size.
- Osek murshe (licensed dealer): Required when turnover will exceed the ceiling, for many regulated professions, and for companies. You charge VAT, issue tax invoices, and file periodic VAT returns.
You can often open an osek patur file online with the Tax Authority for both VAT and income tax. An osek murshe typically uses Form 821 (often through a CPA). Hiring employees or renting business premises may also require a withholding (nikuyim) file.
Don’t skip Bituach Leumi
Self-employed people must register with National Insurance and pay social and health contributions. Opening a Tax Authority file can often include or trigger that registration—confirm your status; late filing can mean back payments. If you incorporate an Israeli Ltd, choose that structure with Israeli advice and an eye on US Form 5471 (below).
On the US side: worldwide income still counts
US citizens and resident aliens generally file on worldwide income. Living in Israel does not by itself remove that duty.
Form 1040 and Schedule C
Business or freelance profit is usually reported on Form 1040 with Schedule C (unless an entity is treated differently). Estimated taxes may apply. Your Israeli books are what your US preparer needs.
FBAR — FinCEN Form 114
If you have a financial interest in, or signature authority over, foreign financial accounts (for example Israeli bank or brokerage accounts) and the aggregate value exceeded $10,000 at any time during the calendar year, you generally must file an FBAR (FinCEN Form 114). It is filed electronically with FinCEN, not with Form 1040. The usual due date is April 15, with an automatic extension to October 15 (irs.gov / fincen.gov).
FATCA — Form 8938
Separately from FBAR, FATCA may require Form 8938 when specified foreign financial assets exceed your threshold. Thresholds depend on filing status and whether you live abroad (higher for many people abroad—e.g. often more than $200,000 at year-end / $300,000 anytime for a single filer abroad; joint is higher). Confirm current IRS instructions; non-filing penalties are steep.
Foreign tax credit — Form 1116
Israeli income tax can often reduce US tax on the same income via the foreign tax credit (Form 1116). You generally cannot credit tax on income already excluded under other US rules (e.g. foreign earned income exclusion, if claimed).
US–Israel income tax treaty
The US and Israel have an income tax treaty that can affect residence tie-breakers, withholding, and some income categories. It does not replace filing, and it is not a social-security Totalization agreement.
Self-employment tax — no US–Israel Totalization Agreement
US citizens and resident aliens with net self-employment earnings of at least $400 generally owe US self-employment tax (Social Security and Medicare), even abroad—unless an exception applies.
Fact check: The SSA lists countries with Totalization Agreements that coordinate dual social-security coverage. Israel is not on that list. There is currently no US–Israel Totalization Agreement. Many Americans self-employed in Israel may face both Bituach Leumi and US self-employment tax on the same earnings. Do not assume “one country only” the way it might for Canada, the UK, or other Agreement countries. Confirm with SSA and your US preparer.
Israeli Ltd owners — Form 5471
US officers, directors, or shareholders of a foreign corporation—including an Israeli Ltd—may need Form 5471 (often at about 10%+ ownership, or control over 50%). CFC, Subpart F, and GILTI can add complexity; penalties for late filings are significant. Discuss the US burden before you incorporate.
How the two sides fit together
- Correct Israeli registration (osek type, income tax, Bituach Leumi—or Ltd).
- Clean Israeli books and on-time filings.
- Annual package for your US preparer: P&L, bank summaries for FBAR/8938, Israeli tax paid for Form 1116, and ownership details for Form 5471 if relevant.
- Calendar both countries’ deadlines—they do not line up neatly.
Closing: get both sides aligned
Running a business in Israel as an American is doable—but paperwork is two-track. Get the Israeli foundation right, then give your US preparer what they need for Form 1040, FBAR, FATCA, credits, and any Form 5471.
Ready for a clear Israeli setup—and a clean handoff to your US tax preparer?
Shmulik Grunberg, CPA, serves clients across Israel and online. Call 052-969-1198 or email 770sgsg@gmail.com to schedule an introductory conversation about your Israeli reporting and how to coordinate with your US advisor.
Author: Shmulik Grunberg, CPA — Israeli CPA, native English speaker, lecturer in accounting at Machon Lev. Serves all of Israel, including online.