The IRS dominates the regulations on determining employment vs. contractor status.  http://www.irs.gov/businesses/small/article.  There are several factors to take into consideration like independence, tools, schedules etc.

But, there are other important decisions that can impact your business as well.  Starting off with one or two contractors can be a great idea, if they meet IRS regs.  Once you get to 5+ contractors, it can get unwieldy.

Contractors can be mavericks and coordinating independent contractors can be a real pain, especially when your client services begin to suffer.  Contractor turnover and reliability issues can negatively impact all aspects of your business, not to mention your need for prescription anti-depressants!

When you get to 5+ contractors, consider converting them into employees.  Those contractors, who are solid, reliable and customer-friendly, will most likely want to be an employee for benefits and a regular paycheck.

So look at the big picture when deciding to hire or contract.  If you are not sure how to decipher IRS regs, call me!