Contractor Or Employee? The Difference On Your Taxes Could Cost You

By John Ostapkovich

PHILADELPHIA (CBS) - Employers beware!  This could be the year you're asked to justify any worker's given independent contractor status, and there's a huge downside if you're wrong.

Bala Cynwyd-based lawyer Christopher Ezold expects 2012 to be a year of scrutiny by the IRS and other agencies looking at revenues due for workers mis-classified as contractors.

He gives his broad definition of a contractor: "Are you setting your own schedule? Do you use your own tools? Are you making a profit? Do you direct your own work? If you meet those requirements you're generally a contractor. If you don't, you're an employee."

The biggest issue can be over benefits. "Let's say you're an employee and you should be part of a health care program and you're not part of it because you've been mis-classified and you have cancer. The employer is going to have to pay for that and that's a huge potential cost."

Ezold says the classification decision deserves a second look. "If you're doing it in good faith, the government really doesn't want to punish you too badly for that, but if you've got no back-up and it looks you made this decision completely off-the-cuff, then the government might assume you're doing it for financial reasons only and you've got bigger problems," from back taxes and penalties to potentially huge medical payments.

He advises you get an expert opinion on your contractors' status.