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AMERICANS IN ITALY

How to lower your social security bill as an American freelancer in Italy

A special bilateral agreement means that American freelancers can usually lower their tax bills by paying Social Security in the US instead of Italy. But exactly how can you take advantage of it?

Published: 13 September 2024 11:05 CEST
A view of central MIlan in summertime
A view of central MIlan in summertime. Photo by Samuel Isaacs on Unsplash

Freelancers in Italy who register for a VAT number (called a partita Iva) pay two main forms of tax: IRPEF, or income tax, and INPS, which are Italian social security contributions.

However, the US is one of just two countries worldwide that uses citizenship-based taxation instead of residence-based taxation. That means US citizens must file US tax returns even if they move abroad – and even if they don’t actually owe any tax.

Because of this citizenship-based taxation, Italy and the US have signed a bilateral social security agreement allowing Americans to pay US Social Security instead of INPS.

Why paying US Social Security can save you money

This bilateral social security agreement can be good news for US freelancers. Professional associations such as the Italian Bar Associations (Ordine degli avvocati) and the National Order of Architects (Ordine degli architetti) have separate pension funds that members can pay into, but foreign professionals often don’t qualify for membership.

Freelancers of any nationality who are not enrolled in a professional association must pay into a state benefits scheme called the gestione separata.

The INPS contribution for the gestione separata is currently 33 percent. That number doesn’t include income tax – just Social Security. By contrast, the US self-employment tax – which covers Social Security and Medicare taxes – is 15.3 percent.

For US freelancers who aren’t enrolled in an ordine, the US Social Security savings are substantial.

How to pay US Social Security instead of INPS

Get a coverage letter

Freelancers who want to pay US Social Security must first request a certificate of coverage from the US Social Security Administration to provide proof that they are exempt from paying Italian INPS. The letter can now be requested online and is valid for five years. 

READ ALSO: LISTED: The visa options Americans can apply for to live in Italy

Pay quarterly self-employment taxes to the IRS

Continue filing a US tax return. Self-employment taxes are calculated using two main forms: a Schedule C (1040) with income or losses, and a Schedule SE self-employment tax form. Freelancers must pay estimated quarterly taxes in January, April, June and September. The amount is based on the previous year’s earnings and can be paid online. Any differences between the estimated tax paid and the actual amount due are reconciled when you file your annual tax return.

Continue paying Italian income tax to the Italian Revenue Agency

Freelancers must continue filing an Italian tax return and paying income tax (IRPEF) in Italy. However, instead of paying Italian social security (INPS), they submit their Letter of Coverage provided by the US Social Security Administration.

FAQs

Are there restrictions on what income I can pay Social Security on?

Americans can pay Social Security on all freelance income, even if the client is located in Italy and pays the invoice in Italy.  

If I paid INPS in the past when I was eligible for Social Security, can I get a refund and pay Social Security instead?

Generally speaking, a taxpayer who makes INPS contributions that were not in fact due can request a reimbursement. However, it can take a long time. The money is refundable within 10 years. 

My Italian accountant said I have to pay INPS even as an American. What should I do?

Many Italian accountants are not aware of the US Social Security exception. 

“The social security agreement between Italy and the United States has existed since the 1970s and is still in force, but it’s not well known,” said Andrea dell’Aquila, a certified chartered accountant in Milan. “It’s quite specific and not well publicized.” 

Dell’Aquila suggests working with a commercialista who specializes in international clients and social security benefits. 

Information about the bilateral agreement is also available on the INPS website in addition to the Social Security Administration site.  

Can I still charge Italian clients 4 percent for social contributions if I am paying US Social Security instead of Italian contributions?

Under Italian law, freelancers can charge clients an extra 4 percent on each invoice to help cover the cost of social contributions, and the client is obligated to pay. However, the law specifically refers to INPS, Dell’Aquila said. 

“If you don’t pay INPS, you can still ask for a Social Security contribution, but you can’t ask by virtue of the law,” he said. 

READ ALSO: Americans in Italy: Is it worth paying for professional help with your taxes?

The client can decide whether to pay the contribution, which is treated like regular income under Italian tax rules. 

Key vocabulary

Partita Iva – Tax identification number

Libero professionista – Freelancer

IRPEF – Italy’s main income tax

INPS – Italy’s National Institute for Social Security 

Gestione separata – INPS’ state benefits scheme for freelancers

Commercialista – Tax accountant

Please note that The Local is unable to advise on individual cases. Find more information on the INPS website or seek independent advice from a qualified tax professional.

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TAXES

How does Italy decide if I’m a tax resident in the country?

Taxation in Italy is famously complex, often creating confusion about who's liable to pay taxes in the country and who isn't. But how do Italian authorities actually decide if you’re a tax resident?

Published: 17 September 2024 15:22 CEST
How does Italy decide if I'm a tax resident in the country?

Italy’s tax bureaucracy can be tough to navigate for Italians and foreigners alike, and situations such as frequent travel, vacation properties and remote work can all cause further confusion.  

Italian law defines a tax resident as anyone who lives in Italy for at least 183 days per calendar year (184 days in leap years). That includes anyone formally registered as a resident of Italy or simply residing here unofficially for more than half the year.  

Italian tax residents must pay tax on worldwide income, not just earnings generated in Italy. That’s why it’s especially important to know what the Italian tax office (Agenzia delle Entrate) considers when applying the 183-day rule – and how it knows how much time you spend in Italy.

The general rule  

For someone who splits their time among several places, the tax authority considers whether Italy is their “principal place” of business, economic interests and personal relations. According to a 2022 ruling from the Court of Cassation, Italy’s highest appeals court, officials look at whether the person owns property or businesses in Italy, has an Italian bank account, or has relatives here.

READ ALSO: Do I need to declare my foreign bank accounts to the Italian taxman?

If you don’t have European citizenship or an Italian immigration visa, you can only legally stay in Italy for 90 out of every 180 days. In that case, you probably won’t meet the 183-day rule.

Keep in mind, though, that the 183 days don’t have to be consecutive, and that short trips outside the country don’t necessarily count as not living in Italy for tax residency purposes if you have business and personal ties to the country.

Proof of residency

Tax authorities look at a variety of factors – some obvious and others less so – to determine how much time you spend in the country each year.

Anytime you enter or exit Italy directly to or from a non-Schengen Area country, your passport will be stamped, providing a record of how long you were in the country.

But given the EU’s open-border policy, tax authorities’ investigations go far beyond passport records.

Reports of wealthy Italians, especially celebrities, pretending they live in countries with a lower tax burden, like Monaco, have also forced the government to get creative.

In addition to property ownership and rentals, which are all registered with the government, tax authorities look at vehicle records, gyms and other club memberships, cell phone records, purchases for flights and train tickets to Italy, credit card use and postal records.  

In the case of celebrities, tax officials even use paparazzi photos and news stories to reconstruct a person’s movements; for the rest of us, social media posts and online activity can provide legally admissible clues about where we go and when.

Alternatively, if you’ve been accused of owing tax in Italy even though you spend most of the year in a different country, these are the types of records you can provide to show that you were actually living abroad.  

When in doubt, you can get a tax residency certificate from your home country stating you live and pay taxes there. If Italy has a double taxation agreement with the country, you will only be taxed in one place.

Paying tax on a holiday home

If you own a holiday home but live there for less than half the year, you will not become a tax resident of Italy simply by virtue of owning property here.

However, you’ll still need to pay any relevant property taxes and waste collection fees on the home.  

READ MORE: What taxes do you need to pay on a second home in Italy?

And any income that you earn in Italy – including from renting out a vacation home when you’re not there – is also subject to Italian taxation even if you’re not a tax resident.

Tax residency for digital nomads

In April, Italy introduced a new digital nomad visa for highly-skilled workers available to both freelancers and remote employees of international companies.

While the digital nomads will generally be legal residents of Italy who must pay tax in the country, some might qualify for a tax scheme for lavoratori impatriati (workers relocating to Italy), which only taxes 50 percent of their income.  

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