Essential guide to the Italian Regime Forfettario: Pros & Cons

Discover the pros and cons of Italy's Forfettario Tax Regime for freelancers and small business owners. Learn how this simplified tax system can reduce your tax burden, streamline accounting, and lower social security contributions, while understanding the eligibility requirements and potential challenges.

The Forfettario Tax Regime is an attractive option for potential business owners and freelancers in Italy.

It offers reduced taxation and simplified accounting to support small-scale entrepreneurs and professionals–a tax system designed for individuals running small businesses or working as freelancers.

Not all those who may wish to partake in Forfettario can. Despite its desirability, the tax regime is often considered complex, exclusive and tough on company losses. Today we explore its pros and cons, to give you the clearest picture possible when deciding for yourself: Is the Forfettario Tax Regime beneficial for me?

What is the Forfettario Tax Regime?

The Forfettario regime is a simplified tax system introduced by the Italian government to support small businesses and freelancers. Designed to reduce administrative burdens and provide favorable tax treatment, the regime allows qualified individuals to pay a flat tax rate on their business income, rather than being subject to standard progressive tax rates. This can result in significant tax savings, especially for those with lower incomes who qualify for the program.

Italy’s government incorporated the tax regime to encourage entrepreneurship and stimulate economic growth within its own borders. By providing a more streamlined and cost-effective tax system, the aim has been to attract new businesses and talent to Italy. The regime also seeks to help reduce the complexity and costs associated with tax compliance, allowing small businesses and freelancers to focus on growing their operations rather than navigating bureaucratic red tape (though this is not always the case).

Top 4 benefits of using Forfettario

The regime may be more complex than some would like, and not all who apply will find themselves qualified to take part in it. Despite these supposed hurdles, the Forfettario tax regime is well worth looking into if you’re an up-and-coming business owner or freelancer in Italy. At Xolo, we love it for these reasons:

1. Lower tax rate: You pay a flat 15% tax on your taxable income, instead of progressive rates. New businesses may qualify for an even lower 5% rate for the first five years, subject to certain conditions.
2. No VAT: You don't charge or pay VAT (Value Added Tax), potentially making your prices more competitive.
3. Simplified accounting: You're exempt from detailed bookkeeping requirements and certain tax audits.
4. Reduced social security payments: Certain business categories can apply for a 35% reduction in social security contributions.

How to register for the Forfettario Regime

If you’re interested in reaping the benefits of the Forfettario Regime, it's time to navigate the registration process. While it may seem daunting, registering for the Forfettario regime is a relatively straightforward process that requires careful attention to detail and guidelines. Outlining the tax system’s key requirements and procedures should help you to enroll in the Forfettario regime with success and start enjoying its benefits.

What to know:

1. Check your eligibility: Ensure you meet all the requirements: 
   1. Business type: You must be an individual (not a company) running a business or working as a freelancer.
   2. Residency: You must be a resident of Italy. (Non-residents can join this regime if they have at least 75% of their total annual income produced in Italy.)
   3. Business ownership: You can't be a partner in certain types of businesses operating in the same field as your individual activity.
   4. Employment income: If you're also an employee, your previous year annual gross employment income must be less than €30,000.
   5. Revenue limit: Your annual revenue must not exceed €85,000.
2. Define your activity: Determine your business activity and obtain the corresponding Italian business classification code (ATECO).
3. Apply for a VAT number: Complete the appropriate form to get your Italian VAT number (Partita IVA).
4. Register with social security: Sign up with the relevant social security administration.
5. Declare your choice: Indicate your choice of the Forfettario regime when you start your activity or in your first tax return.

With a solid checklist, you can confidently move through the Forfettario registry process. 

Maintaining eligibility for the Forfettario Regime

To remain in the Forfettario regime, you must continue to meet certain criteria. Consider these circumstances before you choose to apply, in order to prevent any future hardships or unexpected changes in taxation:

1. Residency and Business ownership: Must remain a resident in Italy and maintain all business ownership requirements.
2. Revenue and expense limits: Keep your annual revenue below €85,000 and payments to employees or collaborators below €20,000.
3. Employment income: If you're also an employee, your employment income must remain below €30,000.
4. Income source: At least 75% of your total annual income must be made in Italy.

Revenue limits and exclusion

It's crucial to monitor your finances to maintain eligibility. If your revenue exceeds €100,000 during the year, you must immediately switch to the standard tax regime. If it's between €85,000 and €100,000, you can continue in the Forfettario regime until the end of the year but must switch regimes the following year.

Calculating taxes, contributions & deadlines with the Forfettario Tax Regime

In the Forfettario regime, taxes and social security contributions are calculated on your taxable income, determined differently than you’d find in the standard tax system. Get a strong grasp on these before diving further into Forfettario, and you’ll be ready for anything.

Calculating your taxable income under Forfettario

Your taxable income is calculated by applying a profitability coefficient to your revenue. This coefficient varies by industry and is called the ATECO code. Depending on the ATECO code (which identifies the activity carried out) a fixed percentage is applied to the turnover produced in the previous year for the calculation of taxes. For example, if the turnover is €10,000 and the percentage of the coefficient is 78%, then taxes will be calculated on the amount of €7,800. Here are a few examples of the above mentioned coefficients:

• 40% for food and beverage street vendors.
• 78% for professional, scientific, technical, and healthcare activities (used in the example below).
• 86% for construction and real estate activities.

Expected tax payments and deadlines with Forfettario

After calculating the coefficient above another 15% tax is applied to all taxable income. Continuing with the previous example from above, if the taxable income is €7,800 and the flat-rate tax rate is 15%, the amount of tax to be paid is €1,170. The 15% tax only concerns the Forfettario flat-rate regime - ordinary tax rate in Italy varies from 23% to 43% depending on the taxable income. The 15% tax (or 5% for eligible new businesses as shown in the example below) is paid in 2 deadlines:

• First deadline: Tax balance previous year plus 50% advance payment current year, due by June 30th (payable in installments).
• Second deadline: 50% advance payment current year, due by November 30th (if it is due).

Social security contributions through Forfettario

The method you utilize for paying social security contributions depends on your profession:

• Registered professionals: Pay to their professional association's pension fund.
• Freelancers without a dedicated fund: Pay 26.23% (in 2024) of their taxable income to the national social security institute (INPS) (used in the example below).
• Artisans and merchants: Pay fixed contributions (about €4,500 in 2024) plus a variable amount on income above a certain threshold.

An example of tax calculations for the Forfettario Tax Regime

Let's consider a freelance web designer in their first year, with a revenue of €30,000:

• Taxable income: €23,400 (€30,000 × 78% profitability coefficient)
• Taxes: €1,170 (€23,400 × 5% tax rate for new businesses)
• Social security: €6,137.82 (€23,400 × 26.23% INPS rate)
• Net income: €22,692.18

This example shows that approximately 25% of the revenue goes to taxes and social security contributions for a single year.

Wrapping up the pros and cons of the Forfettario Regime

The Forfettario regime offers significant advantages for new and small-scale businesses in Italy. However, it's crucial to carefully evaluate your specific situation, considering not just the immediate benefits but also your future growth prospects.

Xolo's accountants are experts on the Forfettario Regime and are ready to help guide you to ensure compliance with all fiscal and social security obligations.

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