Paying and Receiving U.S. Social Security Payments
When U.S. citizens talk about social security payments, it usually means that either they are receiving payments from the Social Security Administration ("SSA"), or they have to pay self employment tax to the SSA. In this Section we will cover both types of payments.
Self Employment Tax
The states of Israel and the U.S. have a tax treaty. A tax treaty is a bilateral (two-party) agreement made by two countries to resolve issues involving double taxation of passive and active income of each of their respective citizens. While the existing tax treaty covers the income tax payments and eliminating double taxation, it is silent regarding self-employment taxes. Usually, social security coverage and benefit payments between countries are called "totalization agreement", which aimed to eliminate double social security taxation. As of today, Israel is not included in the list of countries with whom the U.S. entered into this agreement. AT the bottom line, this means that even a U.S. citizen who lives and works abroad as self-employed, he must pay self-employment tax to the SSA if his net earnings from self-employment were $400 or more. Employees who live and work abroad are not subject to the self-employment tax.
The self-employment tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.
As there is no totalization agreement between the U.S. and Israel eliminating social security double taxation, the payer will be also entitled to social security payments from both countries - double benefits.
Self-Employment Tax Rate
The self-employment tax rate is 15.3%. The rate consists of two parts:
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12.4% for social security (old-age, survivors, and disability insurance) - up to net earnings of $137,700.
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2.9% for Medicare (hospital insurance) - on all net earnings.
Individuals with net earnings above $125,000 (the exact amount depends on the filing status) are liable for an Additional Medicare Tax of 0.9%. Self-employment tax is calculated and paid as part of the annual tax return.
Self-employed U.S. citizens in Israel are still eligible for income tax benefits such as excluding their net earnings from income tax calculation. In most cases, their tax liability will include only self-employment tax.
The Benefits for Those Who Pay Self-Employment Tax
The upside from paying self-employment tax is collecting credits towards social security benefits such as disability and retirement payments from the SSA. According to the current regulates, once an individual collected 40 credits, he is entitled to those benefits. Each year an individual can collect up to 4 credits (that's why they are also referred to as "quarters"). In 2020, you receive one credit for each $1,410 of earnings, up to the maximum of four credits per year. To collect 4 credits you have to earn at least $5,640 as net earnings per year. You can collect these 40 credits within 10 years, so this option is feasible for individuals in their 50s as well.
If you do not collect 40 credits, the U.S. government will not refund your payments and you will not be eligible for social security payments.
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The Retirement Age
The age you begin collecting your retirement benefit affects how much you will receive. Full retirement age is the age when you will be able to collect your full retirement benefit amount. For most individuals, full retirement benefits are payable at age 67. You can get Social Security retirement benefits as early as age 62 (Early retirement age). However, your benefit is reduced if you start receiving benefits before your full retirement age. When you delay collecting benefits beyond your full retirement age, the amount of your retirement benefit will continue to increase up until age 70 (Delayed retirement age). There is no incentive to delay claiming after age 70.
Estimate Your Benefits
The amount of the Social Security benefits you or your family receives depends on the amount of earnings you had - the more you pay the more you receive. For certain individuals, it can be a good investment. You can estimate your benefit amount using the Social Security Calculators page. The average Social Security benefit was $1,503 per month in January 2020. The maximum possible Social Security benefit for someone who retires at full retirement age is $3,011 in 2020.
The US-Israel Tax Treaty states that payments received from the other country are exempt from taxes in both countries.