Is Italy's flat tax rate for freelancers right for you?

Becoming self-employed is an attractive option for those who want the freedom and flexibility of working for themselves.

And, in Italy, this is sometimes also the only viable option for finding work: many companies are unable or unwilling to pay high employee taxes, and instead offer full-time work to self-employed contractors.

In any case, self-employed workers in Italy will need to open a VAT number (Partita Iva) and will be responsible for covering all of their own social security contributions, as well as paying income taxes - which range from 23 to 43 percent depending on income.

As well as the cost, the amount of paperwork and time involved in managing your own tax affairs is one thing that puts many people off opening a Partita Iva.

For this reason, Italy in 2015 introduced the simplified regime forfettario: a flat-rate tax scheme for individuals and small businesses which aims to cut down on red tape as well as lowering tax bills.

READ ALSO: Five essential things to know about filling out your Italian tax return

This flat-rate tax scheme simplifies accounting and so, in theory, frees you up to spend more time doing your job and less time balancing the books.

But while it may be simplified compared to the usual setup, it’s not necessarily simple and there’s a lot to consider before you sign up.

You’ll pay less tax

This is the main attraction: you keep more of what you earn and the taxman gets a smaller share of your income.

Depending on your situation, you could pay between five and 15 percent tax on your earnings.

This is far more favourable than the standard income tax (Irpef) rates you’d pay otherwise, which are between 23 percent and 43 percent of gross earnings.

The lowest five percent tax rate is for new Partita Iva holders only and is available for the first five years.

That means if you’re starting up as a freelancer in Italy, you’re granted this low flat-rate tax on your turnover as long as your self-employment is not an extension of a business you carried out previously.

READ ALSO: The Italian tax calendar for 2024: Which taxes are due when?

After five years, the rate goes up to 15 percent, which is still low compared to the standard Irpef rates.

Note that your taxable income base will depend on the type of work you do and how much you earn, so some may end up paying even less than this.

As the calculations are complex, the best way to find out exactly how the rates would apply in your circumstances is to speak to a qualified accountant (commercialista).

You need to consider social security

As well as tax, you’ll need to consider your INPS (Istituto nazionale della previdenza sociale, Italy's social security agency) contributions - similar to national insurance in the UK, for example, though the rates in Italy are much higher.

The calculation of INPS contributions in the flat-rate scheme varies according to the type of work you do, but it is generally between around 24 and 26 percent of your taxable income.

So while you may be paying as little as five percent in income tax, with INPS the total amount you’ll really need to set aside will be closer to 30 percent.

It's lighter on paperwork

There are several ways in which paperwork is simplified, most notably in that you don't need to keep purchase receipts or track what you’ve bought to offset your taxes

You also don’t need to charge VAT on invoices, so that means you don’t need to complete an annual VAT return. What’s more, you have a competitive edge in the market as you won’t need to add VAT for your clients.

But of course the VAT exemption goes both ways. So, just as you don’t charge VAT, you can’t claim back the VAT you spend on IT equipment, stationery or any other business-related costs.

So if you run a business with high overheads, this may not work out in your favour. This is just one flip-side that might make you reconsider the regime forfettario.

One previous benefit was also that you didn't need to sign up and pay to use Italy's complicated 'electronic invoicing' system, but this changed in 2022 and now freelancers need to use it too - or hire an accountant to deal with the process on their behalf.

There's a limit on how much you can earn

You don't qualify for the regime forfettario if you make more than €85,000 from self-employment in any given year (increased from €65,000 under Italy’s 2024 budget.)

You're also not eligible for this regime if you earned more than €30,000 in the previous year from employment. There is an exception to this, though - if your employment ended in the previous year, you can still apply.

And, while many people in Italy do have a Partita Iva in lieu of an employment contract, you're not allowed to use the flat-tax regime if you'll be working solely for a previous employer.

For more information on the criteria and exceptions, see the website of Italy's Agenzia delle Entrate (tax agency).

Whether this way of freelancing in Italy is right for you overall depends on your personal circumstances and speaking to a financial expert is advised.

Useful Italian vocabulary:

Agenzia delle Entrate – The Italian revenue agency/tax office.

Partita Iva – An Italian VAT number, required to set up as self-employed.

IRPEF – ‘Imposta sui Redditi delle Persone Fisiche’, income tax paid by individuals.

INPS – ‘Istituto nazionale della previdenza sociale’, Italy’s social security and pensions agency.