I think your confusing two separate things. Independant contractors that receive a 1099, and "contractors" where a company pays another company for services.

I think your confusing two separate things. Independant contractors that receive a 1099, and "contractors" where a company pays another company for services. The IRS doesn't care if companies contract services from other companies. They don't like full time employees being treated as 1099 employees because tax collection is more difficult. 1099 employees, as independent business owners, can write off many expenses which are hard to audit and result in lower tax revenue.