In light of increased tax audits, small-business owners that hire independent contractors need now more than ever to ensure they are complying with the tax code.

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In many cases, hiring an independent contractor is cheaper and more convenient than hiring a staff employee. Employers are not required to pay Social Security, Medicare and unemployment taxes for contractors, for instance.

But they could face a hefty bill for back taxes if the government determines that an independent contractor should have been classified as an employee.

According to Internal Revenue Service guidance, there are several tests that can be used to determine a worker's status, namely:

- The degree of control over the worker, which addresses the extent to which an employer can direct how and when the work is done. Less detailed instructions on how to complete a job generally demonstrates less control, indicating that the worker is more likely an independent contractor.

- The worker's financial opportunity, including how a worker is paid and reimbursed for expenses. A regular wage or salary usually suggests that a worker is an employee. Another financial consideration is how much personal investment the worker has in the tools they use.

- The type of relationship accounts for the permanency of the position, the type of benefits the worker gets from the employer and whether the worker provides services that are a key aspect of the business. Another factor is how much freedom the worker has in pursuing other business opportunities.

Each factor is subject to interpretation, and case law on the subject has a history of inconsistent outcomes, making it hard for a business to benchmark a particular situation.

The IRS can help determine a worker's status, if either the employer or the worker files Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, though it could take the agency several months to issue a response.