How to Handle Italy Payroll: Ultimate Guide
Learning how to handle Italy payroll starts with registering your business with the Social Security Institute (INPS), the Accident Insurance Institute (INAIL), and the local labor office in the province where your company is located. The rest of the process is similar to that of the US—but many of the specifics are dictated by what’s indicated in collective bargaining agreements.
Although there is no Italy payroll tax, employers must factor in employee income tax, corporate taxes, and withholding taxes. While you can pay employees with a US bank account, you have to make payments to the government with an in-country bank account.
Best International Payroll Services Compared
We’ve found that Papaya Global is the best overall option for international payroll services, but in case another provider may be a better fit for you, we’ve provided other great options in the table below.
Starter Monthly Pricing
Special Contractor Management Plan
Number of Countries
Other Tools and Services
$12 per employee for global payroll
$770 per employee for EoR
$25 per worker monthly
$20 per employee for global payroll*
$599 per employee for EoR*
$20 per worker monthly
Starts at $599 per employee for EoR
Starts at $49 per worker monthly
Custom-priced for global payroll
$699 per employee for EoR
$29 per contractor monthly
Starts at $599 per employee
Starts at $29 per worker monthly
Starts at $20 per employee for global payroll
Starts at $300 per employee for EoR
$40 per worker monthly
Custom-priced for global employee payments
Starts at $49 per contractor monthly
*Pricing is based on a quote we received
*Pricing is based on a quote we received
Step 1: Set Up Your Business as an Employer
To do payroll in Italy, you first must register your business with the Ministry of Economy and Finance. You’ll also need to register with INPS, INAIL, and the local labor office during this process.
There are several ways to register your business in Italy—the most complicated and costly is to set up an Italian corporation. While this provides more flexibility, it may not be ideal if you don’t intend to expand your business operations in Italy.
The better option is to set up a branch office. While this comes with some hurdles, it’s less costly and time-consuming than fully incorporating, as it’s considered a piece of a foreign entity instead of a separate legal entity.
You will also need a new bank account. You don’t need an Italian bank account to pay employees in Italy, but you do need a local bank account to pay INPS, INAIL, and other government agencies.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process so you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: How frequently will you pay employees? Monthly is most common in Italy, but you can also pay weekly.
- Type of employees: Full- vs part-time?
- Tracking time: How will you track employee hours, and how will it be reported to you?
- Benefits: What benefits will you offer? Who pays for them? How will you manage the payroll deductions?
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes, and to what agencies?
- Payroll processing and calculations: Will you calculate payroll by hand, Excel, or use a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
The typical Italian workweek is 9 a.m. to 6 p.m., Monday through Friday, with a one-hour lunch break. The full-time workweek is 40 hours, and any hours worked over 40 in a workweek must be paid as overtime. The employment contract or collective bargaining agreement determines the rate for overtime.
To ensure your company handles Italy payroll effectively, you should also have policies on:
- Benefits: What benefits are required, and how do you remit payments?
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees’ overtime, and for how many hours?
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Step 3: Determine Salaries & Ensure Compliance
The cost of living in Italy is substantially less than the US, currently about 40% less expensive. The average annual salary in Italy is about €30,000 ($32,200). When determining what you’ll pay your Italian workers, consider their experience and skills, in addition to the cost of living. You may be able to save money by having Italian workers, but you’ll still need to pay competitive rates to ensure you attract and retain the best talent.
Payroll & Employment Law Compliance
Italy has similar employment laws to the US and follows many of the laws set forth by the EU. While that may be the case, it’s still vital to understand the nuances of Italian employment law so that you remain compliant.
Every employee in Italy must have an employment contract or be covered by a collective bargaining agreement. Here’s what must be included in this document:
- Company full name and address
- Employee full name and address
- Physical work location or, if remote, a statement of such
- Date employment commenced
- Duration of contract, either fixed term or without expiration
- Working hours
- Rate of pay calculation and frequency of pay
- Probation period
Employee classification is extremely important in Italy. According to the Italian Labor Code, a worker who manages their own schedule, how they work, and when they deliver work product is an independent contractor. If a company requires a person to work certain hours, offers a regular salary, or supervises their work, they’ll most likely be considered an employee.
Penalties for misclassification in Italy are steep. Companies could face fines, back pay, and be barred from conducting business in Italy.
There is no minimum wage in Italy. Most industries are covered by collective bargaining agreements which set the minimum wage for workers in those industries.
Italy bases the workweek on 40 hours over five days. Any work completed over 40 hours in a week will be paid at a rate described in the collective bargaining agreement or the employment agreement.
Italian employees are entitled to 20 days of paid leave per year. Employees must use at least 10 of these days during the year, but can roll over up to 10 days that then must be used within 18 months.
This is required in Italy and usually paid along with the regular December salary. Some collective bargaining agreements also include a 14th month salary, which is normally paid to employees in June.
Employees are entitled to several paid holidays off each year. If a holiday falls on a non-working day, employees are entitled to a holiday with pay on the working day immediately before or after the holiday.
- New Year’s Day
- Easter Monday
- Liberation Day
- Labor Day
- Republic Day
- Assumption of Mary
- All Saint’s Day
- Immaculate Conception
- Christmas Day (Dec. 25)
- St. Stephen’s Day (Dec. 26)
In Italy, mothers are required to take two months off before the anticipated due date and three months off following the birth of their child. During this entire leave, employees are entitled to 80% of their regular salary from the Italian social services. Employers may be required to make up the additional 20% so that workers out on maternity leave still receive their full regular pay.
Paternity leave is provided for up to 10 days. A father can take one additional day if the mother gives up one of their days of leave.
Italy also provides for voluntary parental leave that can be split between the parents. This leave totals a maximum of 10 months, and employees will receive 30% of their regular wages for up to six months. The remaining four months of leave are not paid. This leave can be split between the parents as they see fit and as coordinated with their employers.
Italy provides for up to 180 days of sick leave per year. During the first three days of an illness, an employer may be required to pay the employee for the time they’re out, if provided for in the employment contract or collective bargaining agreement. Between the fourth and 20th day out sick, INPS covers 50% of the employee’s average daily pay. For days 21 through 180, employees receive 66.66% of their average daily pay.
Italian employees can be terminated for cause, usually meaning a serious breach like theft. Employers may also terminate employees for less serious reasons but will need to provide legitimate business justification for the termination. Terminating an employee in Italy without cause can result in a company having to pay the employee up to three years of salary.
Italy requires notice to be given for both a termination and a resignation. For terminations, employers must give 30 days’ notice to regular employees and 60 days’ notice to managers. If an employee resigns, they must give 30 days’ notice if they’re a regular employee and 45 days’ notice if they’re a manager.
Severance pay is required when an employee is terminated for cause. The calculation is more complex than other countries:
- Employee’s annual salary divided by 13.5
- Add 1.5% for each year of service
Step 4: Collect Employee Data & Forms
As with US-based employees, you’ll need to collect certain data from your Italian employees. This often includes:
- Employee’s full name
- Employee’s permanent address in Italy
- Identification proving the employee’s identity
- Copy of the employee contract or collective bargaining agreement
- Bank account information
Step 5: Collect Time Sheets & Calculate Payroll
When a business first launches, it often uses paper time sheets. We don’t recommend this as it’s ripe for errors and misuse. The best and most effective way to keep track of employee hours is to use time tracking software. Your employees clock in and out electronically, and your managers can review and approve time sheets before they get to your payroll team for processing.
Once payroll gets the time sheets, it should still review them for accuracy. A second set of eyes to spot any glaring errors is crucial to ensuring your company runs payroll correctly each time. It’s easier to fix these errors before running payroll, and it creates a smoother process for everyone involved.
When calculating your Italian payroll, you’ll need to account for tax deductions. Missing these will leave you out of compliance and could cause costly fines and penalties from Italian government agencies.
Social Security (INPS)
Besides these payroll withholdings, you’ll also need to withhold appropriate income tax from your employee’s paychecks. Italian taxes are high by US standards but fairly straightforward.
Up to €15,000
€15,001 to €28,000
€28,001 to €50,000
Step 6: Pay Employees
Now that you’ve reached the point of calculating your payroll, it’s time to pay your employees. Make sure you’re following the pay schedule you’ve previously outlined.
If you have just a single worker or handful of employees in Italy, you may want to outsource your payroll to a local provider. It will be licensed and familiar with Italian payroll laws and processes. While you’ll pay a fee, it’ll likely be worth your time for just a few workers.
However, if you have more employees or plan on dramatically expanding your Italian workforce, you may want to do payroll in-house. Make sure you or your payroll team are familiar with Italian payroll laws and deductions to ensure you’re making the right deductions from an employee’s paycheck and sending tax payments to the right Italian government authorities.
Step 7: Document & Store Your Payroll Records
Payroll records in Italy must be kept for at least 10 years. Your payroll records should include, at a minimum:
- The dates of employment and rate of pay
- The frequency of pay
- Employee’s name and address
- Total regular and overtime pay
- Net employee pay
- Copy of employment contract or collective bargaining agreement
- Leave taken
Doing payroll in Italy for the first time is complex, especially given that you need to engage in a registration process for your business. However, once you overcome those initial hurdles, the processes are similar to the US. Just make sure you take your time and set everything up correctly from the start, especially classifying your workers correctly, as Italy is cracking down on misclassification.