A definitive guide to the Flat Rate scheme in Italy

What is the flat-rate scheme and how does it work? 

Flat-rate scheme in Italy

In this article, we will provide a complete and clear overview of the flat rate scheme in Italy for foreign/expat freelancers, including what it is, how it works, and how to access it in 2023. 

The flat-rate scheme is a particular type of tax system introduced in Italy with the Stability Law of 2015 (Law 190/2014) and reformed the following year. It replaced the previous Minimum Regime.

Also known in Italy as “regime forfettario”, the flat-rate scheme is a simplified tax system designed for freelancers, for young people who start working independently, for anyone who is starting a small or medium-sized business and self-employed individuals who want to keep things simple when it comes to taxes, limiting costs and reducing administrative burden, as long as turnover and annual income remain below a certain threshold. 

Fixed amount of taxes

The flat-rate scheme allows freelancers to pay a fixed amount of taxes based on their profession, rather than calculating taxes based on their income. This means that instead of trying to keep track of every single expense and income, freelancers can pay a set percentage of their income in taxes. It's designed to make it easier for freelancers to calculate and pay their taxes, without the need for complex accounting procedures. 

The Budget Law 2023 n. 197 published on December 29th, 2022 in the Official Journal, has introduced important innovations in the field of flat-rate arrangements, making it accessible to a wider pool of self-employed workers or freelancers and giving them the opportunity to benefit from the advantages of preferential taxation.

This is the basic information so, let’s try to better understand how the flat rate scheme works and what economic and bureaucratic benefits it can bring.

Advantages of the flat-rate scheme for freelancers in Italy

Now, let's talk about the advantages of the flat-rate scheme. 

One of the biggest benefits of the flat-rate scheme is that it simplifies the tax process, making it easier for freelancer or self-employed individuals to be and stay compliant with the law. 

Tax calculation

One of the major advantages of the flat-rate scheme for freelancers is the ease of calculating and paying taxes. There is no need to keep detailed records of expenses or calculating taxes based on them, as freelancers simply pay a fixed percentage of their income. That makes it much easier for freelancers to understand their tax obligations and file their taxes without the help of a professional. 

Tax deduction

Tax deductions take place independently of the expenses incurred, but according to a fixed lump sum established by a coefficient of profitability associated with the ATECO code (The ATECO code is an alphanumeric combination that identifies an Economic activity. The letters identify the economic macro-sector while the numbers represent, with varying degrees the sub-categories of the sectors themselves), that is according to the professional category they belong to.

Tax rate 

Another important advantage freelancers benefit from is the lower tax rate, which can result in significant savings for freelancers. Instead of paying taxes calculated on their earnings, they pay a fixed percentage of their income therefore they may end up paying less taxes. The flat-rate scheme in Italy, guarantees a 15% tax rate, reduced to 5% for the first five years for those who start a new business. 

Additionally, the advantage for the freelancer is the simplified Record-Keeping: The flat-rate tax scheme eliminates the need for detailed records of all sales transactions, making it easier for freelancers to manage their VAT compliance.

The reduced flat-rate scheme for start-ups 

If you have a start-up, the flat-rate scheme can become even cheaper, with a rate lowered from 15% to 5% of taxable income.

This occurs in the first five years of the start-up, provided one has some specific prerequisites and keeps them for the first five years.

Let’s see together what are the requirements needed to access to the flat-rate scheme for start-ups:

Starting the activity from scratch: 

• it has to be a new activity, it cannot be the continuation of the same or similar activity, previously carried out - with the exception of internship activities set out for example, for lawyers and doctors;

• have not carried out professional, artistic or business activities in the three years preceding the start-up opening, even in partnership or family business;

• In the event that one takes over someone else's activity, the previous entity must not have exceeded 85,000 € of the annual turnover."

Requirements to access the flat-rate scheme in Italy 

In order to access and to enjoy the numerous tax advantages of the flat-rate scheme in Italy and to obtain economic savings, there are some requirements that must be met (and maintained over time).

The most important innovation for the 2023 flat-rate scheme is the increase of the limit of compensation and revenues, which went up from 65,000€ to 85,000€. 

It means that to benefit from the advantages of the flat rate scheme it is mandatory to not exceed the ceiling, fixed at € 85,000, of revenues and earnings of the previous year, or its proportional calculation based on the actual months of activity, if the VAT number is opened during the year. In this case it is necessary to be careful to evaluate revenues and not income: that is, to add up all revenues without taking away any expense, since the flat-rate scheme does not provide for expenses deduction, and consider all this independently from the ATECO code applied and which establishes, instead, the coefficient of profitability. So, to qualify for the flat-rate scheme, freelancers have a turnover of less than € 85,000 per year and they need to meet specific requirements. 

Regarding the ceiling, the 2023 Budget Law provides that:

• if the limit of € 85,000 is exceeded and doesn’t go beyond € 100,000, one can still stay in the flat rate scheme during the current year and simply pay the required substitutive tax, to continue enjoying the simplifications and facilitations. The following year, however, one will not be able to join the flat-rate scheme and its preferential taxation, but will have to adopt the ordinary scheme. 

• If the threshold of € 100,000 is exceeded, one will have to leave the flat-rate scheme immediately to apply for the value added tax (VAT) from subsequent invoices. After two years, if the requirements are met again, one can return using the flat-rate scheme.

Other requirements to access the flat-rate scheme:

• Eligibility: To be eligible for the flat-rate scheme, individuals must be resident in Italy and have a valid Italian tax code. This is necessary to ensure that the applicant is eligible for the scheme and that the Italian government can track their income and taxes. 

• Natural person: be a natural person carrying on an activity of business, art or profession, that is to say, a self-employed person or a sole trader or, at most, a family business: all self-employed professionals can access it without age restrictions. 

• Employment or pension income: Those who are classified as employees or as pensioners can also join the flat-rate scheme, provided that their annual income does not exceed the threshold of € 30,000."This is to ensure that the scheme is only available to those who need it most

• Expenditure: do not exceed the limit of € 20,000 per year for expenditure on employees or collaborators - if you open the VAT number ex novo, the calculation of these expenses will be indicative.

• Access to non-Italian residents: Non-Italian residents cannot access the flat rate scheme, however, even if one doesn’t live in Italy, he/she can access the flat rate if:

• Access to Member States: one resides in one of the Member States of the European Union or in a State acceding to the Agreement on the European Economic Area which ensures an adequate exchange of information

• Producing income in Italy: one produces income, in the territory of the Italian State, which constitutes at least 75% of the consolidated (worldwide) income

Applicants will be able to access the flat-rate scheme in Italy in 2023 by meeting the above-mentioned requirements.

Who cannot access the flat-rate scheme in Italy? 

Here following the causes of exclusion:

• Taxable income: Individuals with a taxable income higher than €85,000 per year are not eligible to access the flat-rate scheme in Italy in 2023. 

• Other activities: Retailers or merchants who carry out jobs within arts or professional services and have other activities at the same time: for example, the participation in partnerships, professional associations, or family businesses. 

• Higher income: Those who, in the previous year, received salaries for a employment job exceeding the amount of € 30,000; this threshold is irrelevant if the employment relationship has ceased during the previous year. 

• Disposal of buildings: any person who carries out, as his principal activity, the disposal of buildings, or parts thereof, of building land (Article 10, No. 1, No 8, of Presidential Decree No. 633/1972) or of new means of transport (Article 53, No. 1, of D.L. 331/1993);

• Other advantageus tax regime: who adopts other flat-rate income-setting schemes or special VAT schemes

In conclusion, access to the flat-rate scheme in Italy in 2023 will be limited to self-employed individuals, small businesses, and individuals with passive income. Large corporations and businesses, as well as individuals with a second job or side income, will not be eligible for the scheme. This system is designed to simplify the tax process for small businesses and individuals with passive income, while ensuring that larger corporations and businesses pay their fair share of taxes.

Open VAT with the flat-rate tax scheme as a freelancer

Starting a business as a freelancer in Italy can be a great opportunity, but it also involves complying with various tax obligations.

Let’s start from the beginning: when should a freelancer open the VAT number?

VAT opening

Opening of the VAT number, always occurs at the time when a regular self-employment takes place. The opening costs are really minimal or even null: it is simply a matter of applying to the Revenue Agency (or instructing your accountant to do so), which will issue an eleven-digit code corresponding precisely to the VAT number, so that the activity can be tracked in the tax system.

Once one’s activity as a self-employed person has been classified, one must understand what it means to open a VAT number and consider all the necessary steps to be taken.

So, how do you open a VAT number? There are three main steps to follow:

• choosing the right tax regime, in this case the flat-rate scheme

• the choice of the ATECO code

• guidance on the payment of social security contributions.

But what are the costs of opening and, above all, of maintaining a flat-rate VAT number?

They are mainly tied to the IRPEF substitution tax rate, fixed at 5% for the first 5 years and then increasing to 15% starting from the sixth year of activity. For flat-rate VAT, however, one can take advantage of the preferential INPS scheme, which allows the freelancer to pay the minimum reduced by 35%, payable in four quarterly installments, provided that the request is made either when the VAT number is opened or by February 28th of the year in which it is opened.

Moreover, using the help of an accountant entails fixed costs to be added to those of managing the VAT number and the support is necessary as it is not always easy to act correctly, the risk of error is always around the corner. We, at XOLO, open your VAT without hassles, in 24h and for free!

So, in order to regulate one’s professional activity, it is necessary to consider the following procedures:

• Making a tax return every year;

• Payments of contributions;

• Payment of fees;

• Costs for an accountant;

• Possible registration to the Chamber of Commerce or to a professional order.

Remember that if you want to open the VAT number and you don’t know how to do it, Xolo experts are at your disposal, we will open your VAT ID in a few minutes, for free, and we will give you all the necessary tips to get started. Contact us for more information!

How to calculate taxes in the flat-rate tax scheme as a freelancer 

Although the flat rate is a tax scheme that simplifies the management of self-employment as a freelancer, it remains important to keep an eye on your accounts and finances, starting with the forecasting and calculation of taxes.

It is important that you know how taxes are calculated in order to create a forecast of how much you will pay each year and manage receipts and expenses.

Four main factors must be taken into account when calculating flat-rate taxes:

• ATECO code:  an alphanumeric code used to classify the different types of economic activity and obtained when the VAT number is opened;

• Coefficient of profitability: a fixed percentage chosen according to the type of activity used to determine how much of the income is to be taxed and which instead is considered the fixed cost of the activity, that is, the flat-rate and non-deductible expenses;

• Percentage rate of substitute tax: in this case 5% or 15%;

• Social security contributions: what you pay to create your future pension and other benefits such as sickness, to be paid through the INPS separate management, the reference Fund or register of your profession or the IVS management for craftsmen and traders.

What is and how the substitute tax in the calculation of taxes works

The first thing to know to calculate the taxes to be paid, is that the tax provided for in the flat-rate scheme is called substitute tax and, in fact, contains and replaces all the taxes in the ordinary scheme, namely IRAP, IRPEF and additional municipal and regional taxes.

The substitute tax is very convenient because it ranges from 5% to 15% and is applied only to the net taxable income.

To make it clearer: if we make the comparison only with the IRPEF tax, present in the ordinary scheme, it must be considered that it is calculated on the basis of one’s income brackets and can range from a minimum of 23% to a maximum of 43%, So, having a single 15% substitute tax, undoubtedly allows a great saving in economic terms.

What, however, is the taxable income to which we have referred to, and how exactly are taxes calculated? Make yourself comfortable: we’ll explain it in a few steps below.

Gross and taxable income under the flat-rate scheme

In order to understand how many taxes to pay on the earnings, one needs to calculate the taxable income, since the substitute tax will be applied only on that.

Expenses incurred during the course of the activity, as is the case of the ordinary scheme, are not deducted in the flat-rate scheme, but a fixed figure of the flat-rate expenditure is calculated on the basis of the coefficient of profitability of each occupational activity.

The coefficient of profitability and the ATECO code in the calculation of flat-rate taxes

The Profitability one, is a coefficient, in the form of a percentage, which varies according to the category of activity and is associated with an ATECO code with which all economic activities are classified.

If you’ve never opened a VAT number, you will probably wonder what the ATECO code is: don’t worry!

The ATECO code is a code of letters and numbers, created by the Agenzia delle Entrate (Revenue Agency) to classify the different professional activities.

The complete list of ATECO codes is available on the website of the Revenue Agency and you are assigned one, when you open the VAT number: you can request your ATECO code to the accountant or to the Chamber of Commerce. 

Below, we have collected some of the most common profitability coefficients, for all the others you can have a look at the table published in the Gazzetta Ufficiale (Official Journal):

• 78% profitability coefficient: professional, scientific, health, technical, educational, insurance and financial activities;

• 40% profitability coefficient: retail and wholesale business;

• 86% profitability coefficient: construction and real estate activities.

The calculation of taxable income in the flat-rate scheme

Your coefficient of profitability is one of the fundamental factors needed to calculate the taxes to be paid together with the taxable income, considering only the earnings collected during the tax year.

Let’s take an example: if an activity, carried out at the end of the year, is paid to you the following year, that revenue is not taken into consideration in the taxable income of the current tax period, but in the following.

It can be of help, in order to remember it, to make the distinction between turnover and revenue: the calculation of taxes is made only on the amount actually collected, that is, on payments made by customers in the reference year, and not on the basis of the turnover.

Now, you can calculate the taxable income with the coefficient of profitability and total revenue. Let’s do this together.

Just multiply the total revenue of the reference tax year by the established coefficient of profitability, and you will get the gross taxable income, that is, the one on which you have to pay taxes, after removing the contributions.

Here is an example:

• total annual earnings 40,000€

• profitability coefficient 78%

• 40,000 x 0.78 =  31,200 €

• 31.200 € = taxable income

Instead, the remaining 22% are the expenses established as fixed lump sums for the management of your professional activity, on which taxes are not calculated: that is the reason why no expenditure is deductible in the flat-rate scheme.

However, it is necessary to take one last step to calculate the taxes to be paid: subtract the social security contributions paid from the gross taxable income, in order to obtain the net taxable income.

How to calculate social security (INPS in Italy) contributions in the flat-rate scheme

The calculation of the social security contributions to be paid depends on the reference economic activity. To simplify,  workers are divided into macro-categories, it can be said that:

• those who have sole management must register for the IVS management for craftsmen and traders: in this case there is a fixed amount of contributions about € 4,500 on a minimum income of € 18,415 (ref. 2024), to be paid in 4 instalments. If the income exceeds the established minimum, a  24% rate shall be applied to the part of income exceeding the minimum;

• the self-employed must register with the reference Fund of their activity (e.g. the Inarcassa for architects, the Enpap for psychologists, etc.), in which fixed contributions have been established, or must subscribe to the separate INPS management  if there is no specific fund with a 26.07% of social contribution rate.

Final calculation and the way to manage the payment of fees

Now that you’ve calculated the social security contributions to be paid, it is necessary to subtract this figure from the gross taxable income to obtain the net taxable income on which, finally, one can calculate taxes.

To continue with the example above, assuming that the freelancer is enrolled in the separate management scheme, he/she will have paid a total of contributions equal to 8.134 € (26.07% x 31.200). Removing this figure from the 31,200 € taxable income, one will get 23,006 €, i.e. the net taxable income.

At this point, in order to calculate the amount of taxes to be paid, it will be enough to multiply the taxable by the substitution rate which we spoke about  in the above paragraphs and that is a rate of 5% or 15%:

• apply 5% if you are in the first five years of of a start-up activity

• apply 15% from the sixth year of activity onwards and for all those who will not open a start-up

In conclusion, it is necessary to multiply the 15% for the taxable income, that is 23.006 €: the total amount of taxes to be paid for the  year will therefore be 3.460 €.

Now that you have figured out how to do the exact calculation of taxes and contributions, how do you proceed to pay them?

Taxes and contributions are paid on the basis of the tax return to the Government, using what is called an F24 form.

You can split the amount into 5 installments, keeping in mind the main payment instalment dates, valid each year, as follows:

• June 30th: balance payment of the previous year and first advance payment

• November 30th: second advance payment

We remind that every year not only the balance amounts for the past year are paid into the Income Tax Return, but also the advance payments for the current year. These advance payments are calculated based on the taxable income of the past year and will be used to reduce the value of the balance of taxes and contributions that you will have to pay in the Tax Return next year.

As regards the amount of advance payments for the current year, these contribute to 100% of the amount of the substitute tax and 80% of the social security contributions determined as a balance for the past year. However, if you believe you will generate a lower turnover in the current year, or if you had closed your VAT number the previous year, then you can proceed with the forecast calculation of the advance payments to be paid or even with their total elimination!

What is the separate INPS management

Not all professions have a Fund or a Register to subscribe to and consequently a social security fund. In order to fill this gap the ‘INPS separate management’ was created, which includes a personal registration number and a social security fund  assigned to each taxpayer to regularise the contributive position.

The function of the INPS separate management is the same as that of the social security funds analysed above, namely the collection of contributions to guarantee pension benefits such as retirement pension, survivor’s pension, invalidity pension and so on. 

In addition to these, there are also benefits, including sickness benefits, accident benefits, maternity and paternity benefits, various types of bonuses, to self-employed people who are not enrolled in a Fund or register, such as: coaches, speech therapists, web professionals, copywriters, health and social workers, osteopaths, holistic operators, interior design and several other figures for which at the moment there are no specific rules and legislation at national level.

The flat rate scheme and electronic invoicing 

From January 2024 all those who adhere to the flat-rate scheme are also obliged to issue electronic invoices through the registration of the document in xml format and the sending, of the same, to the recipient through the appropriate exchange system (Sdi).

It is always necessary to number the invoices issued for the certification of the fees, in progressive order and to keep them and affix a 2 €  virtual stamp duty if the invoice exceeds 77.47 €.

To be able to issue an electronic invoice in the flat rate scheme, it is sufficient to have a computer (or another electronic device) and a software that allows the filling out of xml files. There are specific software, dedicated to the issuing of electronic invoices or one can use the standard software which can be found in the personal area of the Italian Revenue Agency in the section called “Fatture e Corrispettivi” (Invoices and Fees)

In conclusion, invoicing using the flat-rate scheme is a simple and efficient way for freelancers to bill clients for their services.

Deductible costs under the flat-rate scheme

Thanks to the 15% substitute rate (or 5% as we have seen in the case of a start-up), the Taxation system is very convenient and undoubtedly allows great savings on an economic level.

Remember, however, that in the flat-rate scheme you can not download or deduct any expenditure, precisely because the costs of running your own business are already lumped in a fixed percentage, depending on the type of activity.

It is therefore necessary to consider case by case very well in order to understand if it is really appropriate to adopt the flat-rate scheme and it would work even better with the support of a professional in the field. In fact, if the expenses incurred to manage the activity are substantial, It may be more appropriate to adhere to the ordinary scheme, where on the contrary you can deduct several expenses - in general even if the fees are higher.

Xolo: your freelance admin, finally handled by real freelancing experts

Using a service such as Xolo can simplify all processes, so you can just think about the future of your business, while we’ll take care of the rest!

Xolo is much more than an accounting service. Xolo is the trusted partner for every freelancer in the flat rate regime in Italy, with an all-in-one solution to manage billing, accounting, taxation and to make the independent work finally simple. We believe in the power of independent work and we strive daily to make freelancing a truly accessible experience for everyone.

How do we do that?

Thanks to a mix of a fast and easy technology and qualified tax advice of our experts to guide you at all times.

• You can start your freelance career tomorrow: We open your VAT FREE and in 24 hours. All that is needed is one ID and ten minutes in all. Completely online, without setting foot in any office. Not bad huh?

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More than 120,000 freelancers worldwide have already relied on Xolo. Contact us and book a free phone call with our experts!