Italian payroll deductions: what are they and how do they work?
A global payroll solution for a company is necessary to help navigate through the complexities of the Italian tax system. If your business employs a staff then a payroll is required in order to manage salaries, tax deductions, and social security payments for every employee of the company. In Italy, employers are also required by law to make contributions to employee pension schemes and social security.
Before they can begin hiring employees and starting activity and for a company to process payroll it needs to be registered with several other institutions:
Payroll in Italy is not subject to a payroll tax, but they do require a flat corporate tax rate of 27.5%. Employee income tax rates range from 23% to 43% on a progressive scale: earning more money means paying a higher tax rate. Employees might also, on top of the income taxes, be subject to a withholding tax on royalties or dividends.
Social Security and Accident Insurance:
The social security contributions in Italy are paid directly to INPS. Employees may also join private pension funding provided for in their National Collective Agreement in order to increase their personal social security benefits. INAIL covers almost all employees in Italy for accidents caused in the workplace as well as diseases that may accompany specific occupations.
The social security rate is approximately 40% of the employee’s taxable income. This number is split between the employer, who pays 30% and the employee who pays the remaining 10%. However, the rate depends on several factors: what type of work the company performs, the number of employees there are and each employee’s position within the company.
These contributions also cover other funds such as maternity leave, sick leave, unemployment, social mobility and some other smaller funds.
A company will need to decide if they want to set up a permanent establishment or a legal entity. This can be a branch or a limited liability company (either SRL or SPA). The Italian government has introduced tax incentives in order to increase competition; investments in Italy may receive tax credits ranging anywhere from 15% to 50%.
In order to establish the proper structure for carrying out business in Italy, a preliminary tax analysis is suggested which will confirm (or not) if there is a permanent establishment in Italy. This means that there is a representative who is regularly involved in the conclusion of contracts which are approved by the foreign company without material changes. In the event of a permanent establishment, there are additional tax implications for the company and the employees. In this case, the company must perform the role of the tax-withholding agent.
The legal representative of the parent company, as well as the company, needs to be fiscally domiciled in Italy to receive a tax identification number (codice fiscale). If a company is not putting in place a permanent establishment, one solution is the domiciliation of a social security representative in Italy. This person will ensure compliance with all domestic duties via payroll.
A tax advisor is absolutely required to help companies who wish to set up an Italian branch, a capital company or a subsidiary. Income tax deductions must be paid to the tax office (Agenzia delle Entrate) before the 16th of the following month.
Delays in these processes will impact the hiring employees: no employees can begin working before this process is completed.
Check out our video about how to calculate your net salary in Italy.
Taxes and Deductions:
In Italy, the employer is responsible for deducting taxes from their employees’ payslips as well as making sure that they are paid the correct amount on time.
Deductions are based on different factors, for example, the annual employment income, family allowances, number of dependents or if the individual has any disability.
Are you planning to hire people in Italy? Check out our guides about hiring employees in Italy, business laws in Italy, and the differences between spa and SRL in Italy.
After moving back to Italy from the United States in 2013, I realized how much an accounting and tax firm was needed to help expats living in Italy to comply with the local tax regulations.