it's not only the IRS or employee/contractor that you have to be concerned about, but also workers comp and the state. a business that I used to work for was audited by both EDD and workers comp and they each came to two different conclusions after the audit. bottom line, make sure that you have a clear signed contract on file for each contractor that you do business with. even then, be prepared to owe money.
RE: IRS Determination of Employee vs. Independent Contractor