Finding the right independent contractors in Italy can level up your global workforce and bring much-needed talent into your company. But, independent contractor management can become complex if you’re unfamiliar with local labor laws and don’t have mastery over Italian tax codes.
Set yourself up for success before your first project starts by learning more about compliance with the Italian Civil Code, including correctly classifying freelancers, paying them, and turning them into full-time employees. Here's a step-by-step guide on how to run payroll for contractors in Italy.
Step #1: Classify your workers in Italy
Before hiring any contractors in Italy, it’s essential to clearly understand misclassification—accidental or intentional— as it can lead to high costs and penalties.
Here are some of the potential costs:
- In Italy, employers who misclassify their workers can face administrative fines from EUR 100-500 for each misclassified worker.
- Tax authorities can impose severe penalties, including a 90% penalty for inaccurate tax returns and a 20% penalty for improper income tax withholding.
- Per the Italian criminal code, if an employer is found guilty of misclassifying a worker and avoiding social security contributions, they may be subject to fines of up to EUR 50,000 and up to three years in prison.
Employers who misclassify workers as independent contractors can be sued for compensation, including back wages, benefits, and emotional distress.
Here are some of the characteristics that differentiate Italian contractors from employees in the chart below:
Full control over work hours. Italian contractors can determine their work hours and how to complete their work on their own schedule.
More direction from the employer. Italian employees may be given instructions on how and when to perform work under the supervision of a manager.
Equipment and tools owned by the worker.
Equipment and tools typically provided by the employer.
Less integrated. Contractors tend to be autonomous and more likely to work remotely.
Highly integrated. Employees are typically more integrated into the company and work full-time for it.
No entitlement to benefits. Contractors do not receive the same protections and benefits as employees. They also pay their own taxes and social security contributions.
Entitled to benefits. Employees are entitled to statutory employment benefits and protections, such as minimum wage and paid leave. They are also entitled to the 13th-month salary.
Fixed-term engagement. Contractors are typically engaged for a specific project and can work for other companies simultaneously.
Indefinite engagement. Employees are hired for an indefinite period of time and are limited to one employer.
Risk of loss. Contractors may assume more risk and liability for their work.
No risk of loss. Employees are generally shielded from work-related liability.
Subcontracting allowed. Contractors can delegate tasks to be performed by other businesses or individuals.
No subcontracting. Employees are expected to do their work themselves under the employer’s instructions.
Step #2: Determine the best way to pay your contractors in Italy
To start paying contractors in Italy, decide on the payment method that works best for you. With the increase in remote work and global employment, employers now have access to more payment and provider options than ever before. Here are some of the options:
Bank transfers. You can open an Italian bank account, but you can only do so with a legal entity in the country. Once you have an account, you can deposit funds into Italian contractors' accounts. Or you can wire transfer from your U.S. bank account, but you may encounter delays.
International money orders. This traditional payment method can be slow and inconvenient. It requires the physical purchase and deposit of money orders, which may come with fees and unfavorable European exchange rates.
Checks. While it's becoming less common, some contractors may still accept checks as payment. However, processing times may be longer and there may be associated fees.
Digital payment platforms. Not all digital payment platforms are available in Italy. Some employers rely on platforms like Wise, Satispay, and PayPal to pay contractors but avoid Venmo as it doesn’t work in Europe. Remember that exchange rates are subject to change daily, making it difficult to forecast your billings.
Global payroll services. Contractors are not included in the payroll and invoice the company directly for their services. Accounts payable handles this for many companies, but it's a lot to keep track of when hiring in a foreign country. With Rippling, you can pay Italian employees and contractors, wherever they are, in a single pay run.
Step #3: Use global payroll software to process payments for Italian contractors
There are multiple ways to pay contractors in Italy, including Paypal, but paying through global payroll software is the fastest and simplest.
With Rippling, you can pay employees and contractors worldwide, in a single pay run, while complying with local laws. Here’s a preview of how Rippling’s global payroll system works:
Step #4: Ensure your Italian contractor has the right tax information
Employers are exempt from payroll taxes for contractors. Independent contractors are responsible for filing their own taxes and social security contributions to the INPS. Specific tax rates and contributions will depend on the contracting model the worker operates under.
Contractors in Italy must file an annual tax return and pay income tax on their earnings by the end of November, along with municipal and regional tax. The contractor must make two advance estimate payments (in June and November) on the current tax year.
To file taxes, contractors typically need the following:
- VAT registration number
- Tax identification number, or codice fiscale
- Modello Redditi PF form
One of the benefits of processing payments through a global payroll system like Rippling is offloading the paperwork and letting us do the calculations and filing for you.
Frequently asked questions about running payroll for contractors in Italy
Do you need to withhold taxes when paying contractors in Italy?
No, self-employed workers are responsible for arranging and paying their own taxes and social security contributions in Italy.
Does Italy's minimum wage apply to independent contractors in Italy?
Surprisingly, Italy does not have a minimum wage. Contractors are able to set their own salaries.
Do Italian contractors get benefits?
No, independent contractors are not entitled to benefits.
As of June 2017, however, self-employed workers have limited safeguards on the client's ability to change the contract unilaterally or end the working relationship due to needed maternity or sick leave.
Can you pay contractors in Italy in your home currency?
It's typically best to pay contractors in Italy in their local currency, EUR, to avoid fees and exchange rates. But if the Italian contractor agrees to it in writing, they can be paid in another currency.
Can you manually pay contractors in Italy?
Small business owners often process contractor payments manually to cut costs. But, this process can become time-consuming as the business grows, especially when dealing with multiple contractors in Italy and other countries.
It's also important to note that manually processing payments comes with risks:
- Compliance. Manually running payroll runs the risk of human error and omissions. Choose Rippling for automatic compliance with local laws, no matter where contractors live.
- Security. Manual payroll processing using spreadsheets or paper records can pose security risks as sensitive employee information may be lost, stolen, or misused—which comes with penalties in Italy under GDPR and local laws.
Make payroll automatic by using a system like Rippling. Rippling synchronizes HR data with payroll, ensuring compliant and efficient payment processing for employees and contractors worldwide.
How do you turn a contractor into an employee in Italy?
Although hiring independent contractors as a cost-saving measure may be tempting, you can find yourself in legal trouble if they’re really misclassified employees.
Per Italian law, employees are individuals who have a full-time working relationship under the direction and supervision of their employer, as stated in Article 2094 of the Italian Civil Code. If you classify your independent contractor as a full-time employee, you must meet various legal requirements to avoid misclassification. These requirements include an employment contract, tax obligations, social security contributions, benefits, and more.
Plus, you'll need a legal entity in Italy—whether that's through establishing your own or using an EOR service.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.