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>>paying the state opens a can of worms for the feds<< You can avoid that with a bit of planning and excellent documentation. States are notoriously tougher, which is why the IRS generally lets them handle it first as Lion says. The IRS will take any easy pickings when their turn comes, but they don't want to invest anything more. "Cheaper to just pay the state" is a line they hear a lot and they understand it. Heck, they try to get you to say that about their own bill. But now they know it won't cost YOU anything more to fight the bigger federal assessment, because you've already got the complete work-up done. (At this point show them the index to your documentation, with a brief citation of the relevant difference in state and federal law.) That will take care of the last three years. What about the next three? Once you pay the state you must keep going, payroll tax and all. You'd better start planning for the next audit, with all new contracts, significantly revised accounting, third-party documentation like insurance riders, and a TOTALLY different marketing strategy backed by genuine training. Even then, you will never be completely safe. On the other hand, what's so bad about exercising control over the agents that represent the company? The only reason you've given so far is that independent contractors have their own IRA's, which is a pretty lame excuse. I mean, anytime someone falls back on "This is how we did it 1989" I have to wonder just what the real story is.