knowledge 12 September 2025 |

Payroll Tax Disclosure Opportunity for Employee Misclassification after Karshan case

On 11 September 2025, the Revenue Commissioners published new guidance setting out how employers can correct payroll tax issues arising from the misclassification of employees as self-employed persons. Mistakes for the 2024 and 2025 tax years must have been bona fide errors, and the window for availing of these favourable settlement terms will close on 30 January 2026.

Background

In October 2023, the Supreme Court decision of The Revenue Commissioners v Karshan (Midlands) Ltd. Trading as Domino’s Pizza (which is discussed in a previous briefing available here) ruled that the pizza delivery drivers in question were to be treated as employees and not as independent contractors for the purpose of the Taxes Consolidation Act 1997.

For a contract of employment to exist, there must be a mutuality of obligation comprised of both an obligation on the employer to provide work and an obligation on the employee to perform the work. In Karshan, Murray J noted that the term “mutuality of obligation” has been over-used and under-analysed and set out a new five factor test. In May 2024, the Revenue Commissioners published detailed guidance outlining the tax implications of the Karshan case.

Following the decision, many employers came to realise that they had misclassified employees as contractors. As a result, those persons had not been registered for payroll taxes (Income Tax, USC and PRSI). The Revenue Commissioners have recognised that employers may have struggled to adjust their payroll systems in the wake of Karshan and consequently, a limited opportunity will now be offered to employers to correct bona-fide classification errors from the past two tax years. 

The New Disclosure Process – How Will it Operate for Employers?

Employers affected by the Karshan ruling have been invited to make a disclosure to Revenue in respect of 2024 and 2025. These settlements will not be subject to penalties or interest, unless liabilities are settled using Phased Payment Arrangements (“PPA”), in which case interest will be applied over the repayment period.

Employers must either pay the liability to Income Tax, USC and PRSI (Employer and Employee) in full via REVPAY or request to enter into a PPA at the time they submit the disclosure. Employers should calculate liabilities separately for 2024 and 2025. Liabilities will be subject to:

• Income Tax at 20% on the gross amount paid to the employee during the relevant year,
• USC at a blended rate of 3.5% on the gross amount paid during the relevant year, and
• PRSI (Employer and Employee) on an actual basis.

ROS users can submit a disclosure via MyEnquiries by selecting ‘Audit/Compliance’ followed by ‘Unprompted Disclosure’. MyAccount users may submit a disclosure via MyEnquiries in MyAccount. Alternatively, disclosures can be submitted through the Revenue File Transfer System. Once Revenue have accepted the disclosure, the agreed liability to payroll taxes will be brought to account by way of a PAYE assessment made for the month of November 2024 / 2025, as appropriate.

Are there Employee Impacts?

Employees should be advised by their employers not to declare income which is included in this disclosure when filing their income tax returns for 2024 and 2025. Class S PRSI should also not be paid in respect of this income. However, income and gains should continue to be declared where it arises from any other sources in 2024 or 2025, in the usual manner.

Where these individuals filed returns for 2024, a “credit” will be available for tax paid through self-assessment. Any employee who filed a 2024 return and paid Income Tax in respect of the income subject to the disclosure will be dealt with by Revenue on a case-by-case basis. As the deadline for 2025 settlements is due before the self-assessment deadline for that year, “credit” may not be available to employers in this instance. However, there will be “credit” for any relevant payments of preliminary Income Tax.

After the agreed liabilities are brought to account, PRSI records for the misclassified individuals can be created. This is done by way of a single payroll entry for each employee. Revenue can be contacted for assistance in respect of this step.

Limitations

The Guidance notes that the settlement terms will not apply to any intervention which was open prior to 20 October 2023 i.e. the date of the Karshan decision. Similarly, where an employee should have been classified as such under the previous Code of Practice on Determining Employment Status (in effect prior to October 2023), or any published decision of the Department of Social Protection, Workplace Relations Commission, Tax Appeals Commission or a court, employers cannot benefit from the disclosure opportunity.

Revenue make clear that misclassification arising from careless or deliberate behaviour will result in the full liability to Income Tax, USC and PRSI, including interest and penalties.

Most importantly, where employers do not make a disclosure before 30 January 2026, and the liabilities subsequently come to light, the Revenue Commissioners will view the default as arising from a complete failure to operate fiduciary taxes and the relevant legislation will be applied in full. 

The new Guidance is available here. If you would like our assistance in making a disclosure under the new Guidance or determining whether you should make such a disclosure, please contact the team below or your usual McCann FitzGerald LLP contact.