This Freeman Law Insights blog regards considerations, challenges, and opportunities for a domestic U.S. employer looking to or engaged in the employ a U.S. citizen who resides in the country of Italy. This is not legal advice; just legal information, unless you paid for it. However, the legge information here should be useful for those U.S. employers interested in expanding the now ubiquitous U.S. employee remote work regime into the country of Italy.
Employer of Record. The U.S. employer should first evaluate and consider engaging an employer of record who is active in such services in the country where the U.S. citizen will perform the work. An employer of record is, essentially, a third-party service that operates as an employer on a hiring U.S. company’s behalf. This allows the hiring company to avoid having to establish an entity in the foreign country. The employer of record usually handles the legal requirements for complying with the foreign laws for payroll, contracts, and benefits.
Military Considerations. If the employee is a dependent of a member of the U.S. military, the employee should be aware that the rules of Status of Forces Privileges (SOFA) may or may not jeopardy certain military privileges by virtue of the employee’s employ while stationed overseas. See, for example, SOFA information on work in Italy here. https://home.army.mil/italy/my-garrison-Italy/pcsguidevic/living-vicenza/spouse-employement. However, the SOFA privilege matters were recently (August 30, 2023) modified to mitigate the adverse consequences to those U.S. citizen dependents on military bases in, for example, Italy and who work for a U.S. employer, provided that the U.S. citizen has a missione visa. See Telework to US Employers. And, U.S. employees who qualify for the approved telework as such likely fall under U.S. and not Italian employment laws.
Worker Tax Matters. The wages paid to the U.S. citizen living in Italy and working for a U.S. employer are subject to U.S. federal income tax withholding. Limited exceptions apply. A U.S. citizen living and working in Italy is required to file a U.S. tax return and a similar return in Italy, reporting wages from the U.S. employer-issued Form W2. The employee should be advised to engage independent tax counsel because the confluence of U.S. and Italy personal tax laws is or can be complicated.
Worker Social Security. For example, the U.S. employer is likely not required to pay Italian social security because of the Totalization Agreement in place between the U.S. and Italy. The U.S. employer usually must withhold FICA and Social Security from the wages earned by the U.S. citizen working overseas. The U.S. citizen may be taxed, under Italian law, for the amounts withheld for U.S. employment tax purposes (i.e., for FICA and Social Security), and then the U.S. citizen may later receive a credit pursuant to a foreign tax credit for subsequent U.S. tax returns. An exemption may be established through the Totalization Agreement between the U.S. and Italy, and the recently-issued SOFA Telework changes may have mitigated, if not eliminated, that duplication of social security for the U.S. citizen working under the military Telework regime. The U.S. employer generally must request a Certificate of Coverage to establish the U.S. citizen’s exemption from Italian social security. See also https://opts.ssa.gov/s/ for online application for Certificate.
Earned Income Tax Exclusion for the US Worker. The U.S. citizen may also benefit from an exclusion for foreign earned income, if the U.S. citizen meets the requirements applicable for the exclusion. However, the employee may be subject to a double taxation initially, which may then entitle the employee to a refund, based on a foreign tax credit application in later filing years in the U.S.
Written Agreement. In any case, a written contract for remote work between the hiring entity and the U.S. citizen overseas is recommended and advisable (and may be required under Italian law, for example), whether for contract labor or employment. And, an employer of record is recommended, whether the worker is treated as an employee or an independent contractor (the distinction of which has its own set of considerations).
Closing. Italy has a complex system for employment matters, and the international aspects of the potential employer-employee relationship make the arrangement even more cumbersome. But, with attention to detail (and legal and tax requirements), the arrangement is achievable and will not be the first of its kind. Below is a schedule of resources and information on this subject.