IT Sector Compliance Focus
Why IT Companies Face 40-60% Audit Risk & How to Prepare
APEX AV LLC
Ukrainian Labor Law Compliance Services
Stefan Lilienkamp | Managing Partner
Universitetskaya str. 33, office 52, Cherkasy, Ukraine
📱 +380 50 46 01 037 | 📧 stefan@claruskiev.com
🌐 claruskiev.com | ukrpayroll.com
Why IT Companies Are the Highest Risk
Here's why IT is so exposed:
| Criterion | Standard Employment Status | Typical IT FOP Arrangement | Risk Level |
|---|---|---|---|
| Integrated into company structure | ✓ Yes (employee) | ✓ Yes (in dev team) | MATCH |
| Subordination to management | ✓ Yes (manager assigned) | ✓ Yes (tech lead supervises) | MATCH |
| Non-discretionary work | ✓ Yes (must do assigned tasks) | ✓ Yes (assigned to sprint tasks) | MATCH |
| Company provides tools/equipment | ✓ Yes (laptop, software) | ✓ Yes (workstation, IDE, licenses) | MATCH |
| Works on company premises | ✓ Yes (office-based) | ✓ Yes (assigned desk) | MATCH |
| Company controls schedule | ✓ Yes (9-5 office hours) | ✓ Yes (core team hours required) | MATCH |
| Exclusive engagement | ✓ Yes (no competitors) | ✓ Yes (NDA + exclusivity clause) | MATCH |
| Regular income stream | ✓ Yes (monthly salary) | ✓ Yes (fixed monthly invoice) | MATCH |
| TOTAL CRITERIA MET | 8/8 (Employee) | 8/8 (Should be employee) | CRITICAL |
The Bottom Line: Your typical IT FOP developer literally cannot meet fewer than 8 criteria. The arrangement structure itself is the problem.
Financial Exposure: Real Numbers
Scenario 1: One Developer
| Component | Monthly | Annual | 24 Months |
|---|---|---|---|
| Developer salary | UAH 80,000 | UAH 960,000 | UAH 1,920,000 |
| Missing employer tax (22%) | UAH 17,600 | UAH 211,200 | UAH 422,400 |
| Missing employee tax (18%) | UAH 14,400 | UAH 172,800 | UAH 345,600 |
| Missing social insurance (5.35%) | UAH 4,280 | UAH 51,360 | UAH 102,720 |
| Admin penalty (20% of taxes) | UAH 7,120 | UAH 85,440 | UAH 170,880 |
| TOTAL EXPOSURE | UAH 43,400 | UAH 520,800 | UAH 941,600 |
Scale to Team Sizes
| Team Size | Monthly Exposure | Annual Exposure | Risk Category |
|---|---|---|---|
| 3 developers | UAH 130,200 | UAH 1,562,400 | HIGH |
| 5 developers | UAH 217,000 | UAH 2,604,000 | VERY HIGH |
| 10 developers | UAH 434,000 | UAH 5,208,000 | CRITICAL |
| 15 developers | UAH 651,000 | UAH 7,812,000 | CRITICAL |
For a 10-person dev team at UAH 80K/month each: Your audit exposure could reach UAH 5.2M+ annually. With interest and penalties, actual liability could exceed UAH 8M.
Why Audits Will Target IT
Ukrainian tax authorities are aware that IT outsourcing and contractor-based development teams are widespread. They will prioritize audits in this sector because:
- High revenue impact: Large exposure amounts justify audit resources
- Documented arrangements: FOP contracts create clear paper trails
- Clear criteria violations: IT arrangement types are textbook misclassifications
- International visibility: Foreign investors in IT sector increases enforcement priority
- Easy enforcement: Payroll records prove the violations
The 3 Options for Your Dev Team
OPTION 1: Convert to Employment (Recommended)
What: Hire FOP contractors as full-time W2 employees on your payroll.
Pros:
- ✓ Eliminates audit risk entirely
- ✓ Simplest legal position
- ✓ Improves team stability and loyalty
- ✓ Better candidate pool (many prefer employment)
Cons:
- ✗ Higher cost (add 22% employer tax + benefits)
- ✗ Employment termination procedures required
- ✗ Less flexibility if revenue drops
Cost Example (per developer):
- Current FOP cost: UAH 80,000/month
- Employment cost: UAH 80,000 + 17,600 (22% tax) = UAH 97,600/month
- Additional cost: UAH 17,600/month (+22%)
- For 5 developers: +UAH 88,000/month (+UAH 1.056M/year)
Timeline: 60-90 days
When to choose: Core team members, long-term projects, strategic developers
OPTION 2: Restructure for Independence
What: Modify contract terms to emphasize genuine contractor independence (remote work, project-based, client discretion, multiple clients).
Pros:
- ✓ Maintains lower cost structure
- ✓ Provides scheduling flexibility
- ✓ Allows continued FOP arrangement
Cons:
- ✗ Requires actual operational changes (not just paperwork)
- ✗ Still presents audit risk if implementation incomplete
- ✗ May harm team cohesion or productivity
- ✗ Difficult to implement for office-based work
Implementation Requirements:
- ✓ Remote work arrangement (not office-based)
- ✓ Project-based invoicing (not fixed monthly)
- ✓ No assigned workstation/equipment
- ✓ Flexible schedule (no core hours)
- ✓ Freedom to work with other clients
- ✓ No supervision or performance reviews
Cost Impact: Minimal (maybe 5-10% reduction in supervision overhead)
Timeline: 30-60 days for contract changes + operational adjustments
When to choose: Junior developers, part-time contributors, contractors already remote
⚠️ WARNING: This only works if implemented genuinely. Auditors will review actual work arrangements, not just contract language.
OPTION 3: Terminate & Replace with Agency
What: End FOP contracts and hire developers through Ukrainian staffing agencies or outsourcing firms.
Pros:
- ✓ Eliminates your direct liability (agency is employer)
- ✓ No benefits administration for you
- ✓ Flexible team sizing
Cons:
- ✗ Higher cost (20-30% markup by agency)
- ✗ Team turnover risk (not your employees)
- ✗ Less control over hiring/firing
- ✗ Communication friction
Cost Example:
- Direct FOP cost: UAH 80,000/month
- Agency cost with markup: UAH 96,000-104,000/month (+20-30%)
When to choose: If you want to exit the staffing business entirely, or for supplemental team expansion
Timeline: 30-45 days for agency negotiations + transitions
The 7-Day Decision Deadline
Decision Timeline:
| Day | Action | Deliverable |
|---|---|---|
| Day 1-2 | Score each contractor on 8-criteria test | Risk assessment spreadsheet |
| Day 3-4 | Calculate exposure for each person/group | Financial exposure summary |
| Day 5 | Discuss options with leadership + legal counsel | Decision matrix (convert/restructure/terminate per person) |
| Day 6-7 | Begin implementing chosen approach | Employment contracts / agency agreements / restructured terms |
IT-Specific Compliance Checklist
Pre-Conversion Tasks
- Conduct criteria assessment for each developer
- Calculate financial exposure per person
- Determine which developers to convert vs. terminate
- Review current FOP contracts for termination language
- Consult with Ukrainian labor law counsel
- Prepare employment offer letters and contracts
Conversion Process
- Send formal offer letter (employment) to each FOP developer
- Execute new employment contract with 30-day notice (if terminating FOP first)
- Add to payroll system and tax registration
- Set up employee benefits (health insurance, vacation)
- File employment registration with State Labor Service
- Update social insurance contributions
- Process first payroll as employee (not FOP invoice)
Documentation & Compliance
- Maintain signed employment contracts
- Document criteria assessment for each person (for audit defense)
- Retain all FOP termination documentation
- Update org chart and payroll records
- Brief all managers on new employment status
- Update offer letters and onboarding docs for future hires
Post-Conversion Verification
- Verify all converted employees on payroll system
- Confirm tax withholding is correct
- Check that no FOP invoices are still being processed
- Ensure employment contract is in employee file
Company-Type Profiles & Recommendations
Profile 1: Tech Startup (20-50 people)
Typical Setup: Mix of co-founders (employed), senior devs (often FOP), junior devs (mix of employed and FOP).
Recommendation: Convert all senior devs + core team to employment immediately. Consider restructuring juniors if they work part-time or remotely. Cost to absorb: +15-25% in tax expenses for converted devs.
Timeline: 60-90 days
Profile 2: Outsourcing / Staff Augmentation Firm
Typical Setup: Large team of FOP developers "rented out" to client companies.
Challenge: Direct employment doesn't work for outsourcing model (defeats the purpose).
Recommendation: Restructure as genuinely independent contractors OR establish agency partnership model. Requires operational restructuring (remote work, project-based billing, portfolio work).
Risk: High if not restructured properly. Auditors will examine whether work truly is independent.
Profile 3: Product Company (SaaS, etc.)
Typical Setup: Product development team + some FOP contractors for specialized projects.
Recommendation: Convert core product team to employment. Keep true specialists/contractors as restructured FOP with genuine independence (remote, project-based, portfolio work).
Cost Impact: Moderate (+10-15% in employment costs for core team).
Profile 4: Agency / Services Firm
Typical Setup: Client project work, rotating team members, often using FOP contractors.
Recommendation: Create two-tier system: (1) core team (employed), (2) project contractors (restructured for genuine independence). Requires project-based assignments and actual remote/independent work.
Scenario: 5-Person Dev Team Conversion
Your Current Situation
- 5 FOP developers @ UAH 80K/month each
- Current total cost: UAH 400K/month
- Current audit exposure: UAH 2.6M+ annually
Option 1: Full Conversion to Employment
- Action: Convert all 5 to W2 employees
- New cost: UAH 400K salary + UAH 88K (22% tax) = UAH 488K/month
- Cost increase: +UAH 88K/month (+22%)
- Annual cost increase: +UAH 1.056M
- Audit risk eliminated: 100%
- Payback period: Not applicable (tax is ongoing cost, not one-time)
Option 2: Hybrid Approach
- Action: Convert 2 senior devs, restructure 3 junior devs
- New cost:
- 2 senior (employed) @ UAH 90K + 22% tax = UAH 219.6K/month
- 3 junior (restructured) @ UAH 70K (slightly reduced) = UAH 210K/month
- Total: UAH 429.6K/month
- Cost increase: +UAH 29.6K/month (+7.4%)
- Audit risk: Moderate to low (2 protected, 3 restructured + monitored)
- Implementation complexity: Medium
Option 3: Restructure All (Higher Risk)
- Action: Keep all as FOP but restructure terms significantly
- New cost: UAH 400K/month (maybe slight reduction)
- Cost increase: 0% to -5%
- Implementation requirements:
- All must work remote (not office-based)
- Project-based invoicing (not monthly retainer)
- No assigned equipment (BYOD)
- Flexible hours, no core team meetings required
- Must work for other clients simultaneously
- No supervision (self-directed projects)
- Audit risk: Still HIGH (auditors will examine if restructuring is real or facade)
- Operational risk: HIGH (team may become fragmented, productivity loss)
RECOMMENDATION
Choose Option 2: Hybrid Approach
Rationale:
- Protects your core team (2 senior devs) from audit risk
- Modest cost increase (7.4%) vs. large increase (22% for full conversion)
- Maintains operational flexibility with 3 restructured contractors
- Demonstrates good-faith compliance effort to auditors
- Keeps best talent stable (employed seniors) while maintaining budget flexibility (restructured juniors)
Key Success Factors
- Speed: Make decisions within 7 days of criteria assessment
- Consistency: Apply same criteria to all contractors (auditors expect this)
- Documentation: Maintain detailed criteria assessment + decision rationale (for audit defense)
- Legal Compliance: Consult Ukrainian labor counsel before converting or terminating
- Communication: Be transparent with affected contractors about changes
- Completeness: Don't miss any FOP developer in your restructuring (auditors will find them)
📱 +380 50 46 01 037 | 📧 stefan@claruskiev.com
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