The flat tax, i.e. the flat tax at 15%, is introduced by the 2015 Budget law of the Renzi government (article 1, paragraph 64) for self-employed workers with revenues of up to 25,000 euros, and up to 50,000 for those who, for example, provide accommodation or restaurant services. With the 2019 Budget Law, Count I extends the flat-rate flat tax regime up to 65 thousand euros in revenues (article 1, paragraph 9): by 2020, the number of beneficiaries will reach 1 million and 721 thousand, with an estimated average income around 21 thousand euros.
(…) once fully operational, the extension of the flat rate between 65 and 85 thousand euros will produce lower revenues of 404 million a year.
The latest data updated to 2022 is provided by Massimo Bitonci (Lega), undersecretary of the Ministry of Business and Made in Italy: “The flat-rate regime for the self-employed attracts as many as 2.1 million VAT numbers”. With the 2023 Budget law of the Meloni government (art. 1 paragraph 54) the measure is raised up to 85 thousand euros of revenues: at least 170,000 taxpayers potentially affected (see the document of the Parliamentary Budget Office, p. 52).
How the mechanism works
Point one: the flat tax is convenient for those with low expenses, because the costs are deducted on a flat-rate basis on the basis of the type of activity (the so-called “profitability coefficient” foreseen for the Ateco code). Therefore, income tax deductions for children, medical expenses, optional social security contributions, etc. are not possible.
Point two: regional and municipal surcharges are not paid on taxable incomewhich vary from Region to Region and from Municipality to Municipality. For those who live in Rome, the rate of the regional surtax is 1.73% up to 15,000 euros of income and 3.33% on the excess; while the municipal surtax is 0.9%. For those who live in Milan, the regional surcharge is 1.23% up to 15 thousand euros, 1.58% between 15 and 28 thousand euros and 1.72% on the excess; while the municipal surtax is 0.8% for all income levels.
Point three: invoices are issued without VAT and, as a result, it does not download.
Point four: with adherence to the flat-rate scheme also the contribution rate is applied to the income determined on a flat-rate basis.
Point five: the taxpayer who exceeds the threshold of the 85 thousand euros of revenues or fees (but not the 100 thousand) can remain in the flat-rate scheme for the current year. It will come out next year.
Self-employed and employees
Combine these variants, each VAT number makes its own calculations to find out whether or not the flat tax is convenient for it. The estimate is that, once fully operational, the extension of the flat rate between 65 and 85 thousand euros will produce lower revenues of 404 million a year (see document Parliamentary Budget Office, p. 50). Meanwhile, the anger of the employees is mounting, who instead pay the taxes in full. But what is the real difference in tax treatment between a self-employed person adhering to the flat tax and an employee? We start from the same amount for both. For the self-employed, it is necessary to consider the revenues less the expenses established on a flat-rate basis by the ministry on the basis of the Ateco code; for the employee instead we start from his company cost, since the contributions paid by the employer are part of the gross salary (the employee agrees to a lower wage because the company pays part of the contributions). Here is what emerges from the calculations made for Dataroom by Massimo Bordignon and Davide Cipullo of the Observatory on Italian Public Accounts (Ocpi) of the Catholic University of Milan.
Example 1: the plumber
The plumber with a VAT number and revenues of 65,000 euros who decides to join the flat tax puts 35,052 euros in his pocket, and between contributions and taxes it pays 20,848 (37.3%). The steps are as follows (and are outlined in the graphs on Corriere.it). From the 65,000 euros, the flat-rate costs envisaged for his category, which amount to 14% (9,100 euros), are deducted, and we arrive at 55,900. Then the 26.23% of social security contributions provided for by the separate Inps management (14,663 euros) are subtracted, to arrive at the taxable income of 41,237 euros on which the flat tax of 15% (6,186 euros) is applied.
Look what happens instead if the plumber is an employee: the net income is 27,710 euros, and between contributions and taxes it pays 28,190 (50.4%). Let’s start with the cost to the company of 55,900 euros. The company pays 23.81% of IVS social security contributions (disability, old age, survivors) and 7.77% for sickness, unemployment, etc., equal to 13,416 (for the complications of the tax authorities the percentage is calculated with a formula mathematics on the taxable social security fund). Once the subtraction is made, there are 42,484 euros, which is the taxable social security on which the worker pays a rate of 9.19% for the IVS contributions at his expense, and a rate of 0.30% for layoffs, i.e. 4,031 euros . The taxable income for tax purposes is 38,452 euros: with an effective average rate of 24.33%, the Irpef due is 9,355 euros. We must then add regional and municipal taxes: 1,387 euros if the employee is a resident of Rome. In the end, for the same earnings, the employee pays between contributions and taxes 7,342 euros more than the VAT number under the flat-rate regime.
Example 2: the IT consultant
An IT consultant with 85,000 euros in revenues puts 35,710 euros into his pocket, and between contributions and taxes it pays 21,240 (37.3%). For its category, the deductible flat-rate costs are particularly high, 33%, i.e. 28,050 euros. The taxable social security income, therefore, is 56,950 from which the 26.23% of social security contributions (14,938 euros) must be deducted. The flat tax of 15% is applied to the taxable income of 42,012 euros, which is equal to 6,302 euros.
A hired IT consultanthowever, which costs the company 56,950 has a net income of 28,436 and pays 28,514 euros (50.1%) for contributions and taxes. The calculations are the same as for the employed plumber, with the difference that the social security contribution payable by the company for sickness and unemployment is a little lower (5.5%), and its effective average rate is 25.01 % (equal to 9,965). In the end, the hired IT consultant pays between contributions and taxes 7,274 euros more than the VAT number.
Where does the balance tip?
On balance, the self-employed worker pays less taxes, but does not have the protections of the employee (holidays, sickness, unemployment), but he has not even paid the relative contributions. In addition, he has all the uncertainty related to the progress of work. These are undeniable differences, but the mechanism also carries other inequities and distortions. In the event that a worker has an employee income above 30,000 euros and a VAT number, the flat tax cannot be applied to the latter’s revenues. According to calculations by the Parliamentary Budget Office (independent body), three taxpayers out of 4 (77%) who will join the extension of the flat tax up to 85,000 euros belong to the 10% of taxpayers with the highest earned income (see the Upb document, p. 63). Not only that, in general and compared to the ordinary scheme, the more revenues grow, the greater the savings: over 50 thousand euros in revenues it is 4,000, over 60 thousand 6,000, over 70 thousand 8,000, over 80 thousand of 9,000 (see document fig. 1). By not applying VAT and not downloading it, those who adhere to the flat tax have no interest in requesting an invoice for purchases. To stay within the 85,000 euro threshold there is no incentive to grow, and to stay within the threshold there is the incentive to go a little black. Even now, self-employed workers do not declare 69% of their income to the tax authorities, equal to 32 billion euros in 2019 (here the document).
And finally, when one retires, one out of 4 self-employed workers has not paid enough to collect the minimum, i.e. 571 euros per month. What is missing is being provided by the State: 2.6 billion a year.
