Revenue’s settlement opportunity for contractor misclassification:

On 11 September 2025, the Revenue Commissioners published Tax and Duty Manual Part 05-01-30A, introducing a settlement arrangement for employers who may have misclassified employees as contractors. This opportunity, which closes on 30 January 2026, represents a significant development in Irish employment tax compliance following the Supreme Court's landmark judgment in Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino's Pizza.

The settlement provides employers with a narrow window to regularise their tax affairs on favourable terms, recognising that the Karshan judgment fundamentally changed the legal landscape for determining employment status. This article examines the settlement terms, analyses who should consider disclosure, and provides practical guidance for employers navigating this complex area.

At a glance: Key information

Background: The Karshan judgment's impact

The Supreme Court's October 2023 judgment fundamentally changed how employment status is determined for tax purposes. Justice Murray's judgment introduced a five-step sequential framework, replacing decades of often contradictory case law.

The new framework provides clarity but has significantly expanded the scope of who may be considered an employee. Revenue's May 2024 guidelines (TDM Part 05-01-30) demonstrated through 19 examples how the framework applies across sectors, making clear that many long-standing industry practices would no longer withstand scrutiny. Particularly affected are sectors with labour-only contractors, exclusive long-term arrangements, and workers integrated into business operations despite contractor status.

Understanding the settlement terms

Scope and eligibility

Revenue's settlement opportunity applies specifically to misclassification arising from what they term "bona fide classification errors" – essentially where employers relied on a pre-Karshan understanding of the law. As stated in the TDM, "Revenue recognises that employers may have faced difficulties in making the necessary adjustments to their payroll systems following the Supreme Court judgment."

The settlement covers only the 2024 and 2025 tax years. Importantly, it excludes situations where:

• Revenue interventions were already open before 20 October 2023
• Workers should have been classified as employees even under pre-Karshan rules
• Misclassification arose from careless or deliberate behaviour
• Previous determinations from the Department of Social Protection (DSP), Workplace Relations Commission (WRC) or courts indicated employment status

Financial terms

The settlement offers substantial financial benefits compared to standard enforcement. Revenue will accept:

• Income tax calculated at 20% on gross amounts paid (rather than 40% after gross-up)
• USC at a blended rate of 3.5% (rather than 8% standard rate)
• Employee and employer PRSI at actual rates
• No interest charges
• No penalties

To illustrate the financial impact, consider a contractor paid €30,000 in 2024. Under the settlement terms, the total liability for example would be €11,581. Without the settlement, Revenue would typically apply gross-up provisions under Section 986A TCA 1997, resulting in recalculated gross pay of €50,000 and a total liability exceeding €31,500 before penalties and interest.

Procedural requirements

Employers making disclosures must provide Revenue with comprehensive information for each affected worker including full details, payment records and calculations of liabilities. Disclosures should be submitted via ROS or myAccount with specific procedures that require careful attention to technical requirements.

The interplay between tax calculations, PRSI record updates and worker notifications creates multiple points where errors can prove costly, making professional guidance valuable in navigating this process successfully.

Who should consider disclosure?

Sector-specific considerations

Revenue's guidelines identify several sectors where contractor classification practices require immediate review.

Construction remains the highest-risk sector, with Revenue stating it's "difficult to envisage" how labour-only workers would be anything other than employees. Delivery and transport services face similar scrutiny following Karshan itself. Professional services with long-term exclusive arrangements, hospitality with casual workers, and IT contractors engaged as individuals all require careful analysis.

The key message from Revenue is clear: traditional industry practices no longer provide protection if they don't align with the legal framework.

Risk indicators

Based on Revenue's guidelines and enforcement patterns, particular attention should be paid to for example:

• Contractors engaged for 10+ years exclusively
• Former employees who became contractors without substantial change in working arrangements
• Workers who cannot substitute or can only substitute from restricted pools
• Individuals paid through personal bank accounts rather than business accounts
• Workers using company equipment, premises, or branded materials

Critical considerations for disclosure

Employment law implications

While Revenue's settlement addresses tax compliance, employers must consider broader employment law implications. Reclassifying contractors as employees potentially triggers obligations for holiday pay, pension contributions, notice periods, and statutory employment protections. These considerations fall outside Revenue's remit but may significantly impact the total cost of regularisation.

The settlement arrangement specifically notes that determinations by the DSP, WRC or Labour Court may preclude eligibility for favourable terms if they previously indicated employment status.

Worker communication requirements

Revenue requires employers to inform affected workers not to declare disclosed income in their 2024 or 2025 tax returns to avoid double taxation. This creates practical coordination challenges that require careful management. The timing and content of worker communications can significantly impact both the disclosure process and ongoing commercial relationships.

Documentation and record-keeping

Revenue expects employers to demonstrate that misclassification was neither careless nor deliberate, requiring comprehensive documentation of the original classification rationale and application of the new framework. This documentation requirement makes professional assistance valuable in building a defensible position.

Strategic considerations

The cost of non-disclosure

Revenue's guidance makes clear that failure to avail of this opportunity will result in significant consequences. The TDM explicitly states, "Where an employer fails to take this opportunity to disclose liabilities before 30 January 2026, and the liabilities subsequently come to light Revenue will form the view that the default has arisen from a complete failure to operate fiduciary taxes."

This means full gross-up provisions apply, potentially tripling costs, with interest from original due dates and penalties up to 100% of tax. Publication as a tax defaulter becomes possible with no credit for good faith efforts

Implementation challenges

The four-month window presents significant practical challenges requiring employers to navigate contractor identification, framework application, liability calculations, worker coordination, and go-forward compliance – all while managing year-end priorities.

Future compliance landscape

Revenue's initiative signals a fundamental shift in employment status enforcement. The comprehensive May 2024 guidelines, combined with this settlement opportunity, establish clear expectations that traditional contractor arrangements will face enhanced scrutiny. Businesses should anticipate that Revenue will require robust documentation of classification decisions, regular reviews of evolving arrangements, and reduced tolerance for aggressive positions. The era of relying on longstanding industry practices without proper legal analysis has ceased.

Practical next steps

Immediate actions required

Given the 30 January 2026 deadline and the complexity of required analysis, employers should immediately begin gathering contractor information and assessing their exposure. Every contractor arrangement requires careful analysis under the new framework, with individual assessment based on specific facts and circumstances.

The complexity of coordinating tax compliance with employment law considerations makes professional guidance valuable in navigating this process.

Decision framework

The disclosure decision requires balancing multiple complex factors including quantum of liability, strength of employment indicators, employment law exposure, and commercial considerations. Each arrangement must be assessed individually based on its specific facts and circumstances.

The interaction between tax compliance and employment law obligations adds layers of complexity that make professional guidance valuable for most employers. What appears to be a straightforward tax disclosure can have far-reaching implications for employment relationships, commercial arrangements, and future compliance obligations.

Conclusion

Revenue's settlement opportunity represents a critical juncture for Irish employers. The favourable terms recognise the significant change in law following Karshan while providing a pathway to compliance. However, the narrow window and complex requirements demand immediate action.

The overlap between tax and employment law creates complexities that many employers may not anticipate. While the settlement terms are generous compared to standard enforcement, the broader implications of reclassification extend beyond tax to fundamental employment relationships.

Employers who act decisively to review arrangements and make appropriate disclosures will achieve certainty and avoid significant future costs. Those who delay or ignore this opportunity may face substantial financial and reputational risks when Revenue intensifies enforcement after January 2026.

The message is clear: the time for action is now. With timely action and specialist advice, employers can navigate this transition successfully and establish compliant frameworks for future contractor engagement.

This article provides general guidance based on published Revenue materials and should not be considered professional advice. Each situation requires individual assessment based on specific circumstances.