My clients may hire a contractor on a 1099 basis and convert them to a regular employee later. This is a red flag for the IRS and state tax agencies because the individual will receive a 1099 and a W-2 from the same company, for the same services performed, in the same tax year. This can be used as evidence against the company for non-compliance and trigger a tax audit. Contracting with 1099s has encouraged governmental tax audits resulting in increased risk for paying back taxes and penalties, which are very steep for a misclassification of this nature. To be appropriately classified as a 1099 independent contractor, the individual must pass the IRS’s 20 Questions see link: http://www.irs.gov/newsroom/article/0,,id=173423,00.html.  It may also be of interest to read about the IRS Amnesty program:  http://www.irs.gov/pub/irs-drop/a-11-64.pdf

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