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Why would a company want to classify someone as an independent
contractor rather than an employee? There are several very good
reasons:
With independent contractors, you have no obligation to withhold payroll taxes or to pay any portion of the individual’s Social Security or Medicare taxes. In addition, rather than sending the person a W-2 showing earnings and taxes withheld, your only tax responsibility is to complete a Form 1099 MISC at the end of the year if you paid the independent contractor $600 or more.
You are not required to carry workers’ compensation, contribute to an unemployment insurance fund, or offer health, welfare, or pension benefits to independent contractors. Instead, independent contractors are paid only for the time they spend working.
Terminating independent contractors is fairly easy to do because the individual is hired for a set assignment to be completed by an agreed-upon deadline. There is no need for coaching or progressive discipline in the form of written warnings or suspensions and no fear of wrongful termination. Arrangements are usually set up so that written
contracts between your company and the independent contractor
allow cancellation on two weeks’ notice.
Finally, whereas employees are subject to various government
regulations, including wage and hour laws, family and medical leave, and illegal discrimination, independent contractor status, when properly classified, avoids most legal restrictions.

Sounds too good to be true, doesn’t it? As with most things in
business, there’s a catch. Worker classification is no exception. Now
that you know the upsides and downsides of classifying individuals
as employees or independent contractors, tread carefully when determining whether you’ve got a bona fide independent contractor
working relationship. Remember, though, that the IRS strongly prefers
to have workers classified as employees rather than independent
contractors if there’s any doubt at all about their employment
status.

To determine whether a worker is an employee or an independent
contractor, the IRS generally looks at the degree of control you have over the worker. If you, the employer, control, or are otherwise
able to control, not only what’s done but also how it’s done, then
the worker is probably an employee. On the other hand, anndependent contractor status will more likely be upheld when individuals:

Decide when, where, and how to work
Hire, supervise, and pay their own assistants
Conduct work at their own office or shop
Realize a profit or loss for their services
Get paid by the job or receive a straight commission
Make their services available to the general public
Perform services for several businesses at a time

For more information, you’ll find additional guidance in IRS
Publications 1779 and 1976, Independent Contractor or Employee? You can get a free copy from the IRS Forms Distribution Center by calling (800) 829-3676 (1-800-TAX-FORM). You can also download and print IRS publications, forms, and other tax information materials
on the Internet at www.irs.gov. If you still have difficulty making a
determination after employing the IRS’s twenty-factor test, the IRS
will give you a written report of its determination once you complete
Form SS-8, Determination of Employee Work Status for Purposes of
Federal Employment Taxes and Income Tax Withholding, available from the nearest IRS office.

Taken From : The Hiring and Firing Quention and Answer Book