In addition to employees and independent contractors, there are two other categories that workers can fall into. If you hire either of these types of workers, be sure to handle the paperwork properly to avoid IRS audit headaches and penalties:

Statutory employees don’t have federal income taxes withheld, but FICA (and generally FUTA) taxes do apply. Employers need to issue w-2 forms and the workers report income and expenses on Schedule C. These include drivers who distribute food, full-time insurance salespeople, "home workers" who have supplies provided by employers and certain types of full-time salespeople.

Statutory nonemployees include direct sellers and licensed real estate agents. They are treated as independent contractors if most payments for their services are directly related to sales and they have a written contract stating they wont be treated as employees.

For more information, see IRS Publication 15A, Employer’s Supplemental Tax Guide.