Calculating Italian Salaries: RAL And Net Compensations

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Calculating Italian Salaries: how to get to your real compensation

Everyone knows that paying taxes in Italy is notoriously complicated. It’s important to have at least a basic understanding of how to calculate your salary and taxes in order to cope with the cost of living in Italy, especially if you live in one of the major cities. People outside of the European Union imagine that tax in Italy is much higher than, say, those in the United States, but they are much closer than is expected if we take into consideration the high cost of health insurance and the various additional forms of taxes that are paid on goods in the U.S. that are not paid in Italy.

Let’s take a look specifically at personal income taxes. As of 2020 the average salary in Italy is just over €30,000 with an average hourly rate of €14. This average is expected to grow by about 14% percent by 2025. The Italian tax system is progressive, which means that those earning more in Italy are subject to higher income levels. Income tax and social security contributions are deducted monthly from the gross salary by the employers on behalf of the employees.

Who Collects the Taxes?

​The Italian Revenue Agency or Agenzia delle Entrate is the Italian tax authority. The Agenzia is responsible for tax compliance and tax collection throughout Italy. They are responsible for providing, managing and auditing tax services which includes assisting taxpayers, collecting tax revenues, inspecting and assessing taxes. There are some expenses that can lower your taxable income. They include: certain payments for social welfare, life and/or accident insurance, medical insurance and the reimbursement of business expenses with the presentation of all original receipts.

When Should I File?

Tax returns can be filed in September and November and there are two methods of making your return. Check out articles about tax deadlines in Italy in 2020 for more info.

First, the 730 which is available to people who are employed by companies and who don’t have a Partita IVA. The 730 model can be done yourself or compiled by an authorised tax agent. In both cases the form is submitted electronically to the tax authorities. The tax payable or receivable is then added to or deducted from the pay slip of the following July and/or November. The other method is the modello Redditi. This tax return can be filed by any taxpayer. The main difference between the modello Redditi and the 730 is that any taxes to be paid have to be done so directly by the taxpayer, or, in the case of a credit, the taxpayer must make a claim to the authorities.

There are three principal taxes to be paid on income in Italy. IRPEF is the individual national income tax to which all individuals are subject. There are also regional taxes which vary from 0.7% to 3.33% and municipal income tax rates which can vary from 0% to 0.9% and depend on where your fiscal residence is.

Additionally, social security contributions are around 9.2% of gross income. Social security (INPS) is mandatory but contributions to it are deducted from your gross income before calculating taxes. Regarding the INPS amount, employers also contribute an additional 28-30%. For those who are self-employed workers the rate of INPS varies between 25% and 29%. Taxes and INPS contributions can be paid in advance. This kind of payment usually involves calculating residual debt or credit from the previous year and then making an advance payment of the current tax year.

So, let’s look at a brief example using a salary of €38,000, but being more precise than the above graph provides for. This puts us in the bracket between €28,001 and €55,000 with a 38% tax rate. So, after the 10% (rounding up for now) for Social Security we’re at €34,200 taxable income (which is how much money can be taxed in this bracket). The National Income Tax here will be €9,315.99, followed by the Regional Tax (Lombardia for this example) of €496.54 and Municipal Tax (at 1%) of €342.00 which brings us to a grand total of €10,154.53 tax due, and leaving us with €24,045.47 net income. These numbers, unfortunately, will vary slightly from year to year.