I have worked as both an employee and as a contractor. In my business, I haven't yet hired any employees, and I haven't paid any one person more than the reporting threshold, currently $600, to even bother drawing up a contract.
But, when I did work as a contractor for a friend of mine, I carefully studied the IRS implications to ensure that he and I both stayed out of trouble with the IRS. You see, an independent contractor, or "contract worker" has to pay his own employment tax. If an employer treats an employee as if he were a contractor, then the employer is at risk of serious penalties from the IRS. If the contractor fails to pay his employment tax throughout the year, he may face penalties, or simply a larger tax bill than he imagined.
As a business, if someone is going to perform ongoing services to you, at your office, with your equipment and under your supervision, make them an employee. If they perform services to you on demand, at their location or with their equipment under their own supervision, then you can hire them as contractor. If they are somewhere in between these descriptions, ask a trusted business coach or tax professional to evaluate the situation and help you determine where this worker fits into your organization.
If you choose to hire a contractor, keep a separate vendor file for them and place their documents in this file such as any licenses they are required to have, certifications, proof of insurance etc.
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