For Roy Lilley, vice-president of Raleigh Air Cargo Express, a small airfreight company based in Emerald Isle, N.C., using independent contractors has turned into nothing less than a nightmare. After Lilley voluntarily switched his workers to regular-employee status on the advice of his accountant, the IRS is now demanding two years of back taxes. The penalty, some $40,000, threatens to put Lilley out of business. "They're going for blood," he says. "If they assess us for $40,000, we'll go down like the Titanic."

For most small companies, it's more crucial than ever to understand the distinctions between independent contractors and employees. Docuform, a business- and legal-form company founded by a former tax lawyer and certified public accountant, offers some welcome guidance in its Independent Contractors and Employees Guide.

The 40-page booklet explains, in simple language, the issues used by the IRS to test a worker's status. There's a "quick test" and a "long test." Author and Docuform president Gregor S. Chvisuk takes you through all 20 factors in the latter and helps you score them to understand the nuances of each status. Finally, if the IRS does rule against you despite your best efforts, Chvisuk describes two sections of the law that may help you avoid or mitigate the fines the IRS can levy (back taxes, interest, and penalties).

The booklet costs $15. Docuform also sells two versions of an Independent Contractor Agreement, one specifically for salespeople, which also cost $15 each. To order, write to Docuform, 11 Woodmere Rd., Framingham, MA 01701, and enclose $1 for shipping and handling.

-- Ellyn E. Spragins