Complete Guide to Payroll in Italy: Regulations, Calculations & Compliance

Italy is an established EU member with comprehensive integration into the single market. It has the 3rd largest economy in Europe and 8th largest in the world. The country has marked a strong presence in the engineering, science, manufacturing, energy, and automotive industries.  

From a geographical standpoint, Italy has a perfect location providing easy access to Northern Europe, North Africa, Southern Europe, and the Middle East. The country offers well-established infrastructures to companies for R&D and a solid manufacturing base. 

You can take advantage of Italy’s stable economy and start a business. Italy has to offer highly talented employees, which can help expand the business. They must comply with local labor laws and set up a payroll system. The following guide discusses all you need to know about payroll in Italy.

How is Payroll Calculated in Italy?

Payroll is the process of compensating employees for their services in the organization. Employers must consider factors like several employees, working hours, employee pay, salary distribution, and recording payroll expenses. It is usually managed by a company’s accounting or HR department. 

When calculating payroll in Italy, employers must take care of the deductions an employee is eligible for. Let’s go through the contributions included:

Income tax

Corporate bodies in Italy are entitled to 24% of income tax and 3.9% of regional production tax. The non-operating bodies are entitled to a 34.5% corporate tax rate. 

Typically, employee income tax is evaluated on a progressive scale in Italy. The following table highlights current tax brackets in Italy:

Municipalities and regions charge an additional income tax, i.e., up to 2.03% (for regions) and up to 0.9% (for municipalities).

Italian payroll states that all employee salaries, social security contributions, and taxes are in an annual document entitled the Certificazione Unica dei Redditi (CUD). Employers should submit two original CUD documents to all their employees for the preceding reporting year. The deadline for the same is 28th February each year. The Ministry of Finance releases an updated CUD every year. It is updated to assimilate the changes related to the inception of new tax provisions.

Social taxes

In Italy, employers and employees must contribute to the social security system. It accounts for social programs like pensions; benefits for maternity leave, sick leave, and parental leave; workers’ compensation; disability; and unemployment benefits. The National Health Service is funded through general taxation.

Typically, employers contribute 35% of an employee’s gross earnings. The standard rate for employee contribution is 10% of their gross salary. However, the contribution rates differ based on the employment category.

The following table shows contribution rates for various types of social taxes:

Important Elements of Salary Structure in Italy

Different elements constitute the salary structure in Italy. They are discussed below.

Cost to Company (CTC)

This element indicates a company’s total cost when recruiting an employee. It encompasses all salary components, including net pay, gross pay, allowances, etc. 

Gross salary

This salary component is essential to consider when it comes to employee compensation. It refers to the employees’ highest earning ability. It covers both variable and fixed elements of the salary. Gross salary is computed before including any tax deductions.

Net salary

It refers to the amount left after making all the related deductions from the gross pay. It is the payment amount that employees get in their hands.

Basic salary

It refers to the base pay of each employee. Every other component of the salary structure is calculated depending on the basic salary. It makes up approximately 30-40% of the gross salary. The basic pay to the employees depends on aspects like seniority, designation, etc.

Allowances

Employees in Italy are eligible for various types of allowances. These allowances are decided according to the employer’s policy. Employees in Italy obtain some standard allowances like food, travel, and healthcare allowance.

Bonuses

Minimum wage employees are eligible for a monthly bonus in Italy. These bonuses are paid to all other employees in a financial year.

How to Set Up a Payroll in Italy?

Any local or foreign company planning to set up payroll in Italy can follow the below steps: 

• Step 1: The foremost step in setting up an Italy payroll process is registering a business as a locally-owned or foreign-owned company with the Commercial Register. 
• Step 2: Submit certified bylaws, an application, and founding documents. 
• Step 3: The next step is registering the company with valid tax and social security authorities for on-time payments. 
• Step 4: Companies should set up an Italian bank account to make payroll payments. 
• Step 5: It involves the calculation of the payroll amount. In this step, employers can calculate social security contributions, taxes, overtime, verify timesheets, and more.
• Step 6: Confirm the payroll cycle complies with Italy’s federal requirements. 

A Step-by-step Process of Payroll Processing in Italy

Adopting a step-by-step approach can streamline the process of establishing payroll in Italy. The critical steps are discussed below.

1. Selection of a payroll system

You should select a system that suits your company’s requirements and budget. Some of the standard payroll systems include

1. Manual payroll: In this payroll system, the company’s HR professionals manage the whole payroll system. It is imperative to hire personnel experienced in the practical implementation of payroll.
2. Outsourcing: It allows a third party to oversee the company’s payroll functions. The third-party firm charges a small fee in lieu of their services. Third parties should take into account the payroll laws’ adherence.

iii. Payroll software: To automate the whole payroll system, selecting a payroll system that looks after all facets of the payroll is essential.

2. Creation of a payroll policy

• After selecting a payroll system, the next step is to frame specific policies and rules that explain how it works. 
• It must cover all the facets of the payroll cycle, compensation structure, etc. 
• The framed policies and rules should be accessible to all employees.

3. Employees’ registration in the system

• This step involves adding all employee data, like their date of birth, names, compensation structure, etc. 
• You must also add information about the accepted payroll cycle. 
• All these details help smoothly process all employees’ payroll.

4. Set up all employees’ bank accounts

• All employees should have an active account in any private or public bank in Italy. You need to make their salary payments in these bank accounts.
• While this is optional, you can assist your employees in setting up a bank account. 

5. Verifying the timesheets and salary calculation

• After registering all the vital employee information, the next step is verifying their salary. 
• Verify the employee’s working hours and calculate their overtime payments. Subsequently, you must calculate all the deductions and the net payable salaries to all employees. The net pay should also include allowances and compensations.

6. Information verification

• Before paying the salaries to employees, you should double-check all details like ledgers, tax receipts, etc. Make sure to solve the errors (if any) before processing the payroll.

7. Disbursement of pay slips

• This step involves providing a salary slip to all the employees. 
• Employers can either provide a digital copy or printout of the pay slip; it depends on the company’s payroll regulation. 
• The pay slip should incorporate the salary breakup and details of both the employer and employee.

8. Maintenance of the transactions’ record

• Employers should save all the payroll transactions in their payroll register. This step is essential because the payroll register serves as documentary proof to verify that all payments adhere to the timeline.

Payroll Contributions

Based on the salary, both the employers and employees should contribute to social security in Italy as a part of the Italy payroll requirements.

Employers Contribution

Employees Contribution

Payroll Cycle

Generally, the payroll cycle in Italy is monthly, and employees are paid on the 27th of each month. Employers must submit a monthly individual earnings statement specifying employee salary and deductions.

Italy Payroll Options for Companies

Employers can choose different options to process payroll in Italy per their budget and requirements. Here are some options for HR payroll in Italy. 

Internal payroll

Larger companies intending to expand their business in Italy can run their payroll for all the employees (both local and foreign). They must complete the incorporation, register the company, and recruit the necessary staff. There will be a need for in-country HR personnel who are experienced at managing an Italian payroll and competent in fulfilling all the payroll, tax, and withholding tax requirements.

This payroll option is expensive and demands some knowledge of payroll rules and local employment. The company would require a local accounting firm and experienced legal counsel to guarantee full compliance with Italian employment laws.

Local payroll administration

In some instances, a company would register its business in Italy below one of the available forms but choose a payroll provider to manage its payroll. In this payroll option, the company working as the Employer of Record is still fully accountable for compliance with immigration, employment, tax, and payroll rules. However, that payroll provider can outsource the payments, filings, and payroll calculations.

PEO company

A PEO company administers the entire payroll function for your business. You can contact a PEO company like Multiplier to eliminate the hassles of managing your business’s payroll system. Foreign companies can use a fully outsourced service from a PEO like Multiplier to hire and payroll the workforce on their behalf.

Entitlement and Termination Terms

Entitlement Terms in Italy

Entitlement terms are one of the crucial Italy payroll requirements available in the collective agreement or the employment contract. In Italy, an employee is entitled to the following benefits.

i. Maternity leave

Employees in Italy are eligible for five months of maternity leave. Throughout this period, mothers are entitled to 80% of their standard pay from the social security system.

ii. Vacation

Employees in Italy are eligible to get four weeks of paid annual leave. This includes two weeks of successive leave (at the employee’s request). Note that employees should take two weeks of annual leave during the year, whereas they can carry the other two weeks forward for up to 18 months.

Employees can’t receive pay instead of yearly leave except when the employment bond is terminated.

iii. Holidays

There are 12 national holidays in Italy. Generally, they are considered paid leave for employees. The list is:

New Year’s Day

Epiphany

Easter Monday

Easter

Labor Day

Liberation Day

Date of the Founding of the Republic

All Saints’ Day

Assumption Day

Feast of the Immaculate Conception

Stephen’s Day

Christmas Day

Every locality in Italy also gets an additional holiday to honor its patron saint.

Note: If a public holiday is on the weekend, the employees in Italy get an additional day’s pay. Those employees who work on a holiday will get overtime pay.

iv. Sick leave

Collective labor agreements state employee entitlement to sick leave. Usually, Italian employees get full pay during sick leave, compensated by the employer and the National Social Security Institute.

The employer pays the first three days of sick leave at 100% of the regular salary rate for the initial two periods of sickness per year. It decreases to 66% for the third period of sickness and 50% for the fourth. Any succeeding sickness in a year is unpaid.

v. Health coverage

In Italy, healthcare coverage is a guaranteed benefit paid for by employee and employer taxes. The Servizio Sanitario Nazionale (SSN) manages the national health service program. It supports universal coverage to citizens with public healthcare, free of cost.

Termination Terms in Italy

Employment termination is a crucial matter for payroll in Italy. Employers can terminate employees in Italy under the following criteria:

• An employee in Italy may be terminated for a severe and genuine reason. Italian courts state the acceptable grounds for termination is when an employee commits a serious breach, for example, theft.
• However, employers in Italy may terminate their employees on defensible causes for less severe breaches like nonexempt or recurrent absences from work. Moreover, termination is allowed if the employer can impartially prove the corporate need for termination or reasons like a breach of contractual obligations or disregard.
• Employee termination without cause is regarded as abusive treatment in Italy. In such cases, the employee can be granted damages of up to 3 years’ salary.

In Italy, all employees are entitled to severance pay, even when terminated for just cause or during a resignation.

Italy Payroll Processing Company

Italy’s payroll rules can be complex, considering various legal complications. You can explore the maximum possible benefits of payroll rules and regulations in Italy by partnering with a global PEO company like Multiplier. 

How Multiplier Can Help with Global Payroll

When it comes to managing payroll in Italy, various aspects, like payroll calculation, salary structure, payroll processing, payroll cycle, payroll contributions, etc., need to be considered. So, the payroll procedure may seem complex for your business. You can collaborate with a global PEO platform like Multiplier to meet all your Italy payroll requirements.

Multiplier provides efficient EOR solutions to international corporations in more than 150 nations, including Italy. You can stay stress-free about employee recruitment, payroll management, payroll processing, and other tasks because Multiplier’s experts look after all these. Its PEO services are SaaS-based to ensure your Italy payroll process works flawlessly. You can contact us to obtain an in-depth understanding of the offered services.