The Karshan Judgement has changed the rules on employment status. Keith Daly, tax director at Xeinadin Ireland outlines what you need to know.
The Irish Supreme Court’s decision in the Karshan case has quietly gone under the radar. What many don’t know is that it will reshape how employment status is seen from a tax perspective in Ireland.
While the ruling brought much-needed clarity to an area of uncertainty, it has also created a dilemma for employers who relied on contractor models.
“Delaying action could result in Revenue applying standard assessments, including penalties, interest and gross-ups, if misclassification is identified later”
For businesses, the Revenue’s response to the case is a limited, penalty-free disclosure opportunity that offers businesses a narrow window for those who have misclassified workers as self-employed.
But the timeframe is closing in to make those changes. Here is a guide for all you need to know:
What was the Karshan Case?
In October 2023, the Irish Supreme Court delivered a landmark judgment in the Karshan case, clarifying the legal framework for determining whether a worker is an employee or genuinely a self-employed contractor for Irish tax purposes.
Prior to this judgment, the law in this area was less certain and had led some employers to classify workers as contractors when they might, under the new framework, be employees.
The Supreme Court also set out a five-step sequential test to assess employment status, which has now been incorporated into Revenue’s guidance on determining employment status for tax purposes.
What has Revenue announced?
Recognising that employers may have faced challenges in applying the new employment status framework and updating payroll systems, Revenue has published a time-limited disclosure opportunity for employers who may have misclassified workers as self-employed for 2024 and/or 2025.
Under this arrangement:
- Employers can self-review and correct any bona fide misclassification errors.
- Revenue will treat such adjustments as a “technical adjustment”, meaning:
- No penalties will apply, and
- No interest will be charged, provided the disclosure is made by the deadline and all liabilities are properly accounted for.
Who is impacted?
This disclosure opportunity generally applies if:
- You engaged workers as independent contractors during 2024 and/or 2025, and
- Under the Karshan framework, those individuals may be considered employees for tax purposes but were treated as self-employed, with PAYE/PRSI not operated.
However, there is an exception, as this facility does not apply where the misclassification was careless or deliberate, or there was an existing Revenue compliance intervention before the 20th October 2023.
Deadline for Disclosure
The deadline to submit a disclosure to Revenue to benefit from this favourable settlement opportunity is Friday, 30 January 2026.
Disclosures should be submitted via ROS (Revenue Online Service) and must include details of the relevant individual(s), employment status review, and calculation of any tax, USC and PRSI adjustments.
What does this mean for you?
If you discover that any individuals previously treated as contractors should, under the Karshan test, be treated as employees for tax purposes, you should:
- Review those engagements using the Revenue employment status guidance;
- Determine any PAYE, USC and PRSI liabilities for 2024 and 2025;
- Make a disclosure to Revenue by 30 January 2026 to avail of the penalty-free settlement
- If required, work with payroll providers or advisors to update PAYE/PRSI records;
- Notify your affected individuals not to declare this income in their self-assessments for 2024/2025 to avoid double taxation.
Delaying action could result in Revenue applying standard assessments, including penalties, interest and gross-ups, if misclassification is identified later.
Still time
Karshan has made it much clearer where Revenue stands on employment status. Employers have been given a chance to fix genuine mistakes without penalties, but the clock is ticking.
Waiting increases the risk that Revenue steps in later, when there is far less flexibility.
Acting now can save time, money and trouble!
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