Running payroll in Italy

Payroll in Italy is highly complex and comes with a number of challenges for foreign employers looking to set up business or hire new talents in Italy. According to the Global Payroll Complexity Index 2021, Italy has the second most complicated payroll system in the world. 

This is due to a number of reasons which include the multitude of collective bargaining agreements which can have a direct impact on the payroll process and the varying social security contributions that must be paid for each employee. Another reason is that income tax is levied on three different levels, i.e. on national, regional and municipal level.

There are several registration requirements for employers before they can start processing payroll. Payroll-related requirements include:

• Registration with the Tax Agency (Agenzia delle entrate) which will issue a tax identification number

• Registration with the National Social Security Institute (Istituto Nazionale Previdenza Sociale, short: INPS) in order to obtain a registration number needed to issue payments

• Registration with the National Institute for Insurance against Accidents at Work (Istituto Nazionale per l’Assicurazione contro gli Infortuni sul Lavoro, short: INAIL) to obtain mandatory work accident insurance and an employer-specific INAIL code

• Registration with the Labor Office (Centro per l’Impiego) which will provide user access to the online platform used for hiring and leaving declarations 

Deadlines for registration vary from authority to authority. Late registration may result in financial penalties. It is mandatory to use the Labor Office’s online portal to inform the authorities about new hires (and leavers).

Foreign employers can hire employees in Italy without having to set up a local legal entity. However, foreing companies will usually have to appoint a social security representative who will take over the employer’s obligations with regard to the Italian authorities. 

Payments to authorities in Italy - this includes tax as well as social security bodies - have to be made from a local bank account. The Italian government provides a list of selected banks from which employers can choose. 

Income tax in Italy (Imposta sui redditi delle persone fisiche, short: IRPEF) is levied on three different levels (national, regional and municipal level). Social security contributions are shared between employee and employer. The latter is responsible for withholding income tax, local tax and social security contributions at source. 

Tax considerations

The Italian income tax system is progressive. There are four different tax bands and tax rates go up to 43% which is the top rate applicable to income exceeding EUR 50,000 (in  December 2021, the Italian government reduced the number of tax bands from five to four, abolishing the 41% tax rate). 

With some exceptions, all parts of an employee’s compensation are taxable. This includes benefits in kind, bonuses, stock options and more. However, the country operates a tax credit system including employment tax credits and family tax credits. 

Depending on the region where the employee is domiciled, he or she will have to pay an additional regional tax of between 1.23% and 3.33%. On top of this, there might be a municipal tax of up to 0.8%. 

Italian residents pay income tax on their worldwide income, while non-residents are only taxed on income sourced in Italy. To be considered as a resident for tax purposes, employees must be officially registered in Italy or spend more than 183 days in the given tax year in the country. 

There is a special tax regime for expats under which they only pay tax on 30% of their income for five years - if all conditions are met. Under certain circumstances, an extension of the tax regime for another five years is possible. However, only 50% of the income will be exempt from tax. 

Tax withholding and reporting 

Income tax must be deducted and withheld from employee salaries and wages by the employer who is also responsible for submitting the withheld amount to the Italian tax authority. Payments for income tax due must be made by the 16th of the month following the respective pay period.

The payment must be accompanied by a monthly tax declaration (from F24) which must be submitted online. At the end of each year, an annual income tax check must be carried out during which the employer has to verify if the total amount of income tax paid by the employee over the course of the year matches the total amount due and if any refunds or additional payments are necessary.

A yearly tax summary called Certificazione Unica dei Redditi is due by 16 March of the following year. This document is destined for the employee. A similar income tax summary covering all payments made on behalf of the company’s employees must be prepared for the tax authority by the end of October of the next year (form 770).  The tax year runs from 1 January to 31 December. 

Social security contributions

Employers have to withhold the employee’s social security share as well as make their own contributions. Contribution rates vary depending on several factors such as the business sector in which the company is involved in (i.e. industry, trade etc.) and the employee’s position (i.e. staff, executive etc.). There are specific contribution tables which are available to employers to be used for payroll processing.

Generally, social security contributions amount to around 40% of the employee’s salary, of which roughly 30% are paid by the employer (ranging from 27% to 31%) and 10% are paid by the employee. The major part of the contributions goes to the National Pension Fund. The rest is divided between various other social security funds which cover unemployment, sickness, maternity and more. 

The administrative body responsible for collecting the contributions is the Italian National Social Security Institute (INPS) - except for contributions to the mandatory accident insurance which are made directly to the INAIL. Payments to the INPS are made on a monthly basis. The due date is the same as for the income tax remittance, i.e. the 16th of the month following the pay period for which the payment is made. Late payments are subject to financial penalties. 

The contribution level for the occupational accident insurance depends on the risk classification and ranges from 0.4% to 9%. The insurance premium is paid in advance (usually in January), together with the balance of the previous year.  

Employers further have to make regular contributions towards an in-company TRF (Trattamento di Fine Rapporto) fund which is the severance fund set up for employees in case they leave the company. TRF payments are usually around 7%. 

In addition, there are supplementary health and pension funds which offer an additional layer of protection and coverage on top of the public system under which employees are automatically covered. Employers deciding to offer these additional benefits to their employees (usually directors and executives) must register with a fund that is either specifically destined to employees covered by the NCLA which applies to the company or open to employees across all industries and sectors. Contributions are deducted and withheld as part of the monthly payroll process. Payment intervals are dictated by the respective fund. 

Employees in Italy are entitled to various benefits. These include:

• Annual leave and public holidays: minimum 4 weeks, plus 12 public holidays

• Maternity leave: 5 months paid at a rate of 80% of normal salary/wages

• Paternity leave: 10 days on full pay (up to January 2021, it was only 7 days)

• Parental leave: up to 11 months (between both parents)

• Sick leave: regulated by collective agreements, generally between 6 and 12 months, first 3 days paid by the employer  

For more information on employee benefits and other employment requirements in Italy (including severance pay and termination procedures), check out our Global Hiring Guide.

Many employment-related regulations are subject to collective agreements which are concluded for specific industries and sectors and are valid on the national level. These agreements are called NCLAs and they also cover the rules for employee compensation. The minimum pay which must be provided to an employee is generally regulated by NCLA which determines the payable amount as well as mandatory salary increases. Apart from those stipulated by collective bargaining agreement, there are no minimum wage levels in Italy. 

The NCLA may also stipulate the payment of a 13th and 14th month salary which are payable in June and December. Overtime pay is equally regulated by collective bargaining agreement - or by the individual employment agreement if the latter is not the case. 

Payroll in Italy is usually processed once a month. Payments are normally made at the end of the month, with the 27th being the most common pay date. The standard currency for wage and salary payments is Euro (EUR). Accepted payment methods include check, money order, postal order and bank transfer which is the most widely used payment option. 

It is legally required to provide employees with a payslip - electronic payslips are accepted. Employees must receive their payslip on the actual payday. There is a 5-year period during which all payroll-related records must be kept.