Employers offered disclosure opportunity to rectify self-employment misclassification

Irish Revenue recently issued a new Tax & Duty Manual introducing a time-limited disclosure opportunity for employers to rectify cases where workers were misclassified as self-employed in 2024 or 2025.

This settlement opportunity is being provided by Revenue following the Supreme Court judgment in Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza, which introduced a new five-step decision making framework to determine a worker’s employment status.

Why this matters

The Karshan case introduced a significant shift in the legal interpretation of employment status and whether workers should be classified as an employee or a self-employed contractor.

Employers who genuinely relied on prior guidance or case law in effect before the Karshan ruling and thus in good faith treated employees as contractors should carefully consider availing of Revenue’s one-off settlement arrangement.

This would involve disclosing details of payments made to workers who historically have been treated as independent contractors and paying any 2024 and 2025 PAYE, USC and PRSI underpayments relating to those individuals.

If the disclosure is accepted by Revenue, employers will pay no penalties or interest and avoid what could otherwise be steep financial consequences if the status of the workers were successfully challenged by the Revenue in the future.

Where an employer meets the eligibility requirements but elects not to disclose on any employee misclassification, they lose out on the potential to save significant costs and risk Revenue audits or interventions, in which case overdue taxes, interest, and penalties would be imposed in full if any misclassifications are later uncovered.

Key highlights

Scope of the settlement arrangement

The disclosure opportunity applies to bona fide misclassification errors in 2024 and 2025, i.e. cases where workers were paid without PAYE withholding due to an employer’s good-faith belief (based on then-existing guidance or case law) that the worker was self-employed.
The misclassification must not be the result of careless or deliberate conduct, and this settlement arrangement does not cover situations where it was clear even under pre-2023 guidance and case law that the worker was an employee.
Any cases already under audit or compliance intervention before 20 October 2023 are specifically excluded.

No penalties or interest for qualifying disclosures

Employers who make a disclosure under this initiative will face no interest or penalties on the liabilities for 2024 and 2025, provided the disclosure is accepted by Revenue.
Revenue is treating these adjustments as a “technical adjustment” under the Code of Practice for Revenue Compliance Interventions, meaning the employer will calculate and pay the outstanding Income Tax, USC, and PRSI due for the affected workers, but no surcharge, interest, or penalty will be levied, provided the disclosure meets the conditions.

Deadline

The deadline for the submission of a disclosure under this settlement arrangement is 30 January 2026 and employers must submit the disclosure and settle all related liabilities by that date to avail of the no-penalty and interest treatment. Where liabilities are settled by way of a Phased Payment Arrangement, interest is applied over the repayment period

Simplified tax calculation method

Revenue’s Tax & Duty Manual provides a standardised method to calculate the tax liability for 2024 and 2025: Income tax is calculated at a flat rate of 20% on the gross payments made to affected workers and a blended USC rate of 3.5% applies. Full employer and employee PRSI must be paid at the appropriate rates.
Notably, it is not necessary to gross up any net pay figures for purposes of calculating the tax liability due under this settlement arrangement.

Alleviating potential double taxation

Many contractors who were paid without payroll withholdings being operated may have already filed income tax returns or paid preliminary tax on the relevant income themselves.
In an effort to prevent any double taxation, Revenue will give a credit for any income tax already paid by the individual on 2024 earnings and for 2025 preliminary tax payments where the earnings are included as part of an accepted disclosure. However, it is not yet clear how this will work in practice.

KPMG insights

Identify and quantify exposure

Employers should quickly work to identify any affected individuals engaged as self-employed contractors during 2024 and 2025 who should properly be classified as employees under the five-step decision making framework.
Once potential misclassified employees are identified, the potential tax exposure should be quantified, i.e. PAYE, USC and PRSI should be calculated as outlined above (separately for 2024 and 2025).

Prepare and submit the disclosure

All required information should be gathered for each affected worker and the disclosure submission should be prepared.
Employers will need to provide Revenue with the basis for their view that the employees are within the scope of this settlement arrangement, and it must be clearly shown that the misclassification arose from behaviour which is neither careless nor deliberate. In such cases, Revenue will consider the employer to have self-assessed their position and disclosures will be accepted on this basis.
The disclosure should be submitted via ROS and the outstanding liability paid by 30 January 2026.

Implement corrections going forward

It is crucial that employers rectify any employee misclassifications identified on a go-forward basis in parallel with settling for the 2024 and 2025 tax years.
For any employee misclassified as a contractor, this means setting them up as an employee on payroll. There are also wider ramifications to consider such as, employment law implications, issuing an employment contract to the individual, continuity of service and pension and leave entitlements, to name but a few (albeit it is possible that an individual can be considered an employee for tax purposes but not for employment law purposes).

What’s next?

We anticipate that Revenue will increase scrutiny of workers’ employment status in future, and this is likely to become an area of increased focus in audits and compliance interventions.

This is an opportune time for employers to conduct a thorough review of all contractor arrangements (even those not covered by this Tax & Duty Manual). Where contractor arrangements are identified which fall foul of the 5-step decision making framework laid out in the Karshan case, employers may wish to consider submitting a voluntary disclosure to Revenue (albeit outside of the current settlement arrangement) and correct the position going forward.

If employers have any questions about Revenue’s settlement arrangement as laid out in the Tax & Duty Manual or more generally around the correct classification of employees and appropriate next steps, they should consult with their qualified tax professional or a member of the GMS tax team with KPMG in Ireland (see the contact us section).