Control is the test
The IRS looks at behavioral control, financial control and the relationship. If you set the hours, supply the tools and direct the work, the worker is probably an employee.
What changes for the payer
For employees you withhold income tax and FICA, pay the employer share of FICA and unemployment tax, and issue a W-2. For contractors you collect a W-9 and issue a 1099-NEC.
Misclassification
Treating an employee as a contractor can lead to back taxes, penalties and interest. When in doubt, ask a tax professional or file Form SS-8 with the IRS.