The IRS has (or did back when it mattered to me:) a list of guidelines (10 if I recall) that guide around this notion.

It asks questions like who provides the tools (IC's do, employees don't), IC can turn down jobs, employees cannot. IC can control the schedule, employees cannot. IC can set the price per job, employees cannot.

In the past, the IRS was concerned to a large degree about IC's being stuck with the self employment portion of FICA, etc as well as being screwed out of worker's comp during injury.

These protections exist in the landscape of an unequal relationship. A true employer will force an employee into IC status to save money and the IC cannot turn it down because he/she needs the money to feed the family (hence the inequality). A lot of these cases occur when the IC/employee gets an injury and an attorney looks at the IRS questions and determines that the "employer" should have been honoring an "employee" status, and they're often right.

I know personally one pretty funny and extreme case where a restaurant owner forced the wait staff into IC status. A tax preparer friend filed for a waitress and refused to agree to pay SE taxes, saying the employer failed to withhold and issue a w-2 (instead of a1099). The IRS agreed and went back to the employer for 5 years of everyone's share of FICA tax.

Ouch! Pretty funny and I knew the restaurant owner (though not as his preparer).