Employee or contractor? Revenue gives employers an opportunity to correct payroll issues – without penalty

Businesses have until 30 January 2026 to correct payroll tax issues owing to employment status – without penalty from Revenue

On 11 September 2025, the Revenue Commissioners announced an opportunity for employers to correct payroll tax issues arising in 2024 and 2025 due to a bona-fide misclassification of workers as being self-employed where they ought to have been treated as employees. The relevant employer will be permitted to enter into settlement terms in respect of the payroll tax issue without incurring a penalty where they engage with Revenue prior to 30 January 2026 on the issue. 

In conjunction with this announcement, Revenue has published ‘Revenue Guidelines - Settlement arrangement arising from ‘Revenue v Karshan (Midlands) Ltd. trading as Domino’s Pizza’ (available here) (Settlement Guidelines).

Background - how did we get here?

Handed down in October 2023, the decision of The Revenue Commissioners -V- Karshan Midlands Ltd TA Dominos Pizza [2023] IESC 24 was highly significant because it clarified the test for assessing employment status and whether a worker is a contractor or an employee.  The question of employment status should be resolved by reference to the five questions, which are further explained here.

To be clear, the Karshan decision did not introduce new principles but rather clarified the test that existed pursuant to previous case law.  In this respect, Murray J stated, “the method I have proposed is no more than a reduction of the existing case law”.

From a tax perspective, whether an individual is classed as an ‘employee’ or a ‘contractor’  directly impacts on who is responsible for deducting the appropriate income tax, Universal Social Charge (“USC”) and Pay Related Social Insurance (“PRSI”) from the relevant wage received by the worker, and ensuring timely remittance to Revenue.

Where: 

1. the worker is an employee, it is the responsibility of the employer;
2. the worker is a contractor, it is the responsibility of the worker. 

In May 2024 and to assist with the application of the test in Karshan, Revenue published ‘Guidelines for Determining Employment Status for Tax Purposes’ (Revenue Guidelines).  The Revenue Guidelines summarise the test in Karshan, and include a decision tree and 19 examples to illustrate the application of the test.

In October 2024 and, again to assist with the application of the test in Karshan, Revenue, the Department of Social Protection and the Workplace Relations Commission jointly published the Code of Practice on Determining Employment Status.  The publication was joint because whilst the question of employment status in Karshan was determined in the context of tax treatment by Revenue, it is intended that the test would also be consistently applied by the Department of Social Protection and in the Workplace Relations Commission, subject to differences in legislative frameworks.  That being said, it cannot be assumed that a decision by Revenue, the Department of Social Protection or the Workplace Relations Commission will necessarily be replicated by the other.

Revenue’s announcement of last week and associated Settlement Guidelines are yet further measures to assist and incentivise businesses with the application of the Karshan test.

What does Revenue’s announcement mean for businesses?

An issue which is most likely to arise is a misclassification of employees as contractors, resulting in an employer failing to deduct and remit the required income tax, USC and PRSI on the worker’s behalf.  Businesses who engage contractors to work on their behalf would therefore be advised to review existing contractor arrangements in place anew, in light of the Karshan decision. 

Making the disclosure

In respect of the years 2024 and 2025, where an employer identifies that there has been a misclassification of an employee as a ‘contractor’, an unprompted disclosure of the misclassification can be made via Revenue’s online service, ROS, to Revenue. 

For the purposes of the settlement, the Settlement Guidelines note that employees will be treated as if they have been paid ‘gross’ by the employer, without deduction of income tax, USC or PRSI.  The employer will be required to calculate the applicable income tax, USC and PRSI liabilities for the impacted employee, to be submitted as part of the disclosure.  The Settlement Guidelines provide guidance on calculation of the settlement figure (due for submission by 30 January 2026), and note:

• Income tax is to be calculated at the standard rate of 20% on the gross amount paid to the employee during the relevant year.
• USC is to be levied at a ‘blended rate’ of 3.5% on the gross amount paid; and
• PRSI is to be calculated on an actual basis.
• Credit will be available for income tax paid by the employee through the self-assessment system in respect of 2024 only.
• Revenue have advised that the misclassification and resulting tax issues will be treated as a ‘technical adjustment’, and no penalties will apply. 

In respect of PRSI, the employer will also be required to create a PRSI record for the impacted employee for 2024 and 2025.  Guidance on creation of the PRSI record is provided within the Settlement Guidelines. While the guidance does not directly address the issue, it can be assumed that regularisation of the PRSI position will requirement payment of both employee and employer’s PRSI in respect of the employee.

Significance of the deadline

Where an employer fails to avail of the settlement option by the 30 January 2026 deadline in respect of any tax implications arising from a misclassification of workers for 2024 and / or 2025, this will be treated as a complete failure to operate fiduciary taxes by Revenue, with interest and penalties to be applied. 

What about tax issues for periods predating 2024?

If businesses identify tax issues with regard to misclassification of workers for periods before 2024, the usual disclosure regime applies.  To the extent they have not already been made subject to a compliance review by Revenue on the issue, an employer who identifies income tax issues arising before 2024 would be advised to consider submitting an unprompted qualifying disclosure to Revenue.  While an unprompted qualifying disclosure will not provide the total relief from penalties offered under the settlement terms, it may result in a significant reduction of the applicable penalties where coupled with the full cooperation of the employer in the matter.

What are the implications from an employment law perspective?

When revising the characterisation of workers from a tax perspective, businesses should also consider the implications of characterising workers as employees from an employment law perspective.  Whilst the Karshan decision was a Revenue decision, the intention is that the Workplace Relations Commission would apply the same test, subject to any differences in the legislative frameworks.  This means that, as a general rule, businesses would take a uniform approach to the characterisation of workers from both a tax and employment perspective.

Practically, if employers determine to re-characterise contractors as employees, they should consider implications for workers’ employee entitlements during the period of engagement, such as minimum wages, annual leave, sick leave, notice period, as well as for the maximum working week, breaks, redundancy pay and protections pursuant to the unfair dismissal jurisdiction.  All of these entitlements will necessarily be determined by reference to workers’ period of continuous service, which will generally be from when they first commenced work (unless there was significant shift in the way they have been engaged).  Employers may also consider whether it is appropriate to issue relevant workers with a new contract which accurately reflects that they are employees.

Re-characterisation is likely to raise some complex technical issues for retrospective employee entitlements, for example, where a worker was absent on occasions because they were unfit for work when they may have been entitled to sick leave as an employee, or where a worker was previously absent owing to being a parent when they may have been entitled to parental leave as an employee. 

Some careful strategic thinking should be applied to rectify issues associated with mischaracterisation from an employment law perspective, in particular where issues of mischaracterisation are far-reaching or apply to workers who are no longer in the employ of the business.

The RDJ Employment and Tax Teams are available to provide expert advice in this regard should you have any questions.