Maybe you want to expand your services to Italy or make use of the country’s large gig economy but aren’t sure about how to pay contractors in Italy safely. With relatively high unemployment and a mobile youth population, Italy has a lot to offer in terms of independent contractors with skills.
However, avoiding issues when you need to hire and pay contractors in Italy can be tough. However, INS Global gives you the key information you need to work with contractors and use the right payment method according to all relevant labor and employment regulations. That way you don’t fall into the usual traps surrounding worker types and employer responsibilities.
What are the Differences Between Employees and Independent Contractors in Italy?
The primary source for Italian employment regulations, the Italian Civil Code (Codice Civile). The code defines an independent contractor as a worker who performs specific work projects for a company or another individual without being subject to their control. This means that when it comes time to pay contractors in Italy, there are specific processes that the contractor needs to follow.
Rather than working under an employment agreement, contractors work under a contractor’s agreement. This document states that they agree to perform specific tasks while managing their own hours, manner of working, and rates. Contractors are therefore not part of a client’s management structure like employees.
Employment Laws in Italy and How They Relate to Contractors
Worker benefits and rights in Italy relate to contractors depending on how they interact with clients. Contractors in Italy can generally work in two ways, either as freelancers (ditta individuales) or as sole proprietors (impresa individuales).
Sole proprietors in Italy
Sole proprietorship in Italy gives an individual the smallest available business structure, along with all liability responsibilities. These are businesses registered with all relevant authorities, and tax payments are made as a business.
Freelancers in Italy
Freelancers do not register themselves as a company, but must still register with their relevant professional authority if one exists (i.e. hairdressers, teachers, etc.). They must also apply for a VAT number through the appropriate channel.
Once the freelancer has chosen their method of doing business and makes tax and social security payments according to the appropriate obligations, they are provided with many of the same rights and protections as employees. However, in this case, they are guaranteed directly by the state.
How to Handle Taxes and Other Payroll Costs When You Pay Contractors in Italy
Outside of the way that contractors perform their work, the main difference between employees and contractors in Italy is that a company does not manage tax or social security contributions for the contractor.
Instead, a client company will pay contractors in Italy the full agreed-upon amount according to a designated due date. The contractor then manages their own personal income taxes (based on the same progressive scale at a state, regional, and municipal level). Sole proprietors pay taxes on their business profits only.
When applying for a VAT number, contractors can opt for a flat rate tax if they believe their income will be less than €85,000 yearly. This flat rate is much lower than standard tax rates for the first few years of operation.
Contractors in Italy may also claim tax credits on earned income below €50,000.
For social security, sole proprietors submit tax documents and pay their contributions directly to the INPS (National Social Security Institute, Instituto Nazionale Previdenza Sociale). Freelancers report payments and pay supplemental security income contributions to their professional association or the INPS if not. These generally depend on the amount of income a contractor makes.
In this way, contractors can benefit from all of the same standard leave payments as employees. They will also be eligible for retirement and disability benefits.
What are the Contractor Misclassification Risks in Italy?
Companies are at risk of misclassifying contractors when they treat or pay contractors in Italy like employees (i.e. requiring them to work to a certain schedule, paying them on a fixed monthly basis, etc).
Should a company be found to be misclassifying a contractor in Italy in this way, they will be investigated and subject to penalties. These penalties may include fines, back payments of tax and social security contributions, limitations on certain work activities in the future, and possible criminal charges.
In general, the company will be required to formally recognize the contractor as an employee. This means they become eligible for all of the compensation and benefits that they should have received throughout the work agreement.
These penalties can also disrupt a contractor’s professional activities or lead to a loss of professional reputation.
How Do I Convert an Independent Contractor into an Employee in Italy?
When a contractor proves themselves to be a positive asset, you may want to keep them on as an employee. You may also wish to avoid to high costs required to pay contractors in Italy for a project with open ends. In this case, you must be able to successfully help them through the transition from contractor to employee.
You’ll have to convince them of the benefits of giving up the flexibility that comes with freelancing and the typically higher hourly rates that companies pay contractors in Italy.
You can do this by highlighting the benefits, protections, and long-term security of an employment contract.
In circumstances where the contractor works internationally, this may mean having the necessary structures in place in their home country to pay them consistently and compliantly.
An EOR (Employer of Record) services partner is a third-party company that can hire and pay professionals on your behalf. This allows you to work with new employees in countries or regions where you don’t currently have a company organization. This includes organizing all HR functions such as visa processes (for foreign workers) and integrating local employees into a payroll system.
An EOR can also provide the legal expertise and knowledge you need to successfully navigate the procedures of converting an independent contractor to an employee in Italy.
Four Potential Ways to Pay Contractors in Italy
1. Direct Deposits
Even while direct deposits are often used to pay workers, you can use them to pay contracts once or frequently based on your work agreement and payment schedule.
While doing this, take care to keep contractor payments separate from other payments provided to regular employees. Additionally, remember not to deduct in the same way that you would with employees.
The majority of contractors used to prefer checks as a payment option, but they are now far less common. Checks are less dependable because of their relative scarcity and potential for bounces. They take longer to complete, are more prone to loss, and are slower than electronic payments.
3. PayPal or Other Online Payment Systems
With an increasing number of businesses and organizations accepting only electronic payments online, as well as high fees, PayPal has experienced significant declines in popularity over time. However, these online payment systems continue to represent a quick and easy way to pay independent contractors around the world.
4. Guaranteed Payroll Services
Payroll partners, umbrella companies, and third-party services are specifically designed to pay independent contractors and other self-employed workers on time and following the law.
A Professional Employer Organization (PEO) in Italy can handle HR in the country for your employees or pay contractors in Italy on your behalf.
At the same time, an Employer of Record (EOR) in Italy can hire employees or contractors on your behalf. Employer of Record service providers become the legal employer for you, therefore allowing you to hire without a local entity or provide additional benefits without extra liability when you want to pay contractors in Italy.
Both of these services give you enhanced flexibility in new markets with no additional employer responsibilities.
These payroll partners have the legal expertise to guarantee that you pay contractors in Italy correctly and per all relevant legislation.