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Credit: Tom Deja
The federal government has definite rules when it comes to classifying independent contractors and employees. Essentially, if the person acts like and is treated like an employee then, according to the federal government, that person is an employee.
Worst-case scenario: A contract worker is no longer needed, he files for unemployment benefits, your company gets investigated by the Department of Labor, and you end up having to pay back-taxes, Medicare and Social Security contributions, workers’ comp, and even back wages and any applicable overtime payments.

Paper Trail

This nightmare can be avoided by having the proper documentation on hand. Every non-employee who works for you should get a Form 1099-MISC for payments of $600 or more in a given year, and all independent contractors should get W-9 and I-9 (proof of citizenship) forms.

Act of Congress

The Payroll Fraud Prevention Act is currently in Congress and aims to prevent employers from cheating full-time employees out of benefits and avoiding paying payroll and other taxes by simply classifying them as independent contractors.
The Internal Revenue Service has a list of Common Law Rules to determine whether or not a worker is in fact a company man or a ramblin’ man.
1. Behavioral: Do you control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Do you control the business aspects of the worker’s job — reimburse expenses, provide tools/supplies, etc.?
3. Relationship: Do you have a written contract or give the worker any benefits (insurance, vacation pay)? Will the relationship continue? Does the worker perform an essential duty at your business?
Granted, satisfying these rules alone doesn’t determine whether a worker is an independent contractor or an employee. E.g., it’s doubtful there’s an independent contractor on any jobsite who wouldn’t fail the first “behavioral” rule. After all, what employer doesn’t control what a worker does and how he does it? That’s called managing.
Although you need to have the paperwork to prove a worker’s status, sometimes that isn’t enough. Basically, don’t treat all your workers as equal. E.g., don’t give the contract worker a company email address, business cards, or a company truck or pay him out of payroll or provide tools or supplies. Benefits are forbidden, as is reimbursing expenses incurred on the job. There’s more, but you get the idea.
Remember, when dealing with workers, Uncle Sam is watching!