If you're a business owner or manager, you've likely hired a contract worker at one time or another. Unfortunately, the term "contract labor" is highly misused in business today, with employers often assuming that a worker's contract or employee status is dependent on the length of the commitment.

However, the qualification is actually determined by the type of relationship. Hiring an independent contractor without awareness of the governing guidelines could be dangerous and potentially disastrous for your business.

Although regulations have been in place for decades, it's more important now than ever that you are in compliance. In May, President Barack Obama proposed nearly doubling the funds to enforce U.S. tax laws next year, aiming to identify violators and collect substantial fines from employers, estimated to total $2.1 billion within five years. During their review, auditors will identify misclassification of workers as independent contractors, and, unfortunately, many employers will discover the cost of this avoidable mistake.

Hiring an independent contractor may solve a short-term staffing need or seem like an easy, low-commitment option during uncertain economic times; however, you must first take the steps to ensure the worker qualifies as an independent contractor. While this process can be arduous and confusing, your HR manager or an outsourced HR partner can provide valuable guidance and peace of mind in making the determination.

As an employer, you have extensive employee wage reporting and tax responsibilities. Failing to properly report and pay employment taxes, whether intentional or not, can result in significant fines and interest payments. Erroneous classification of an employee as independent is one such violation.

Unfortunately, small businesses can no longer hope that the IRS will pass them over to focus on larger companies. Any company is at risk of coming under review, and, for small businesses especially, the potential fines associated with misclassifying employees could be disastrous.

According to the IRS, "The general rule is that an individual is an independent contractor if you, the person for whom the services are being performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result."

In other words, are you hiring the individual to accomplish a defined end result for a set agreed fee, regardless of how many hours or by what methods he/she completes the task? This type of person likely qualifies as an independent contractor.

Conversely, "If you can control what will be done and how it will be done