Not to mention the issue that in many US states the enforcement of misclassification laws are on the rise and the penalties are stiff. So unless you can make a good case why a contractor should not be an employee--the main allowed reason being they're performing a task outside of your business's competency--don't outsource to a contractor based in your own state.
Yeah, this has worried me, too. I'd be interested in the best way to hire "contractor like" positions on a W2... e.g. I pay you as an employee but we're both clear on the expectation that you are not permanent.
I mean, I am small enough to dodge the 'wrongful termination' bullet, but I still have to pay unemployment insurance, and really, I think it's just fair to be up front and clear with people about where they stand. I mean, that part can be done verbally, but it would be good to hear what the 'correct' way to do it would be.
Jessica - I'm a YC founder too, and most people have strong opinions on this. (http://bit.ly/9uDFfe); Maybe, you should ask pg, what he thinks.