Vendor management for language services involves more than finding and paying some freelancer translators or LSPs. Right after tax season in the United States last year, we received the following message from the president of a language service provider: “A couple months ago we were notified that because we issued a 1099 to a Texas freelancer, we must file Texas Franchise Tax reports (for the last 7 years) and pay the tax. End result is $1.00 tax due for last year, and the accountant is still working on the 7 previous years! Today a similar notice arrived from Michigan: ‘Any business …performing services in Michigan with … independent contractor, has nexus and may be liable for SBT’ accompanied by 26 pages of forms and instructions. Again, probable result will be no tax due, but if this trend continues with other states our CPA will end up doing several of these returns annually. In both instances we simply used a freelance translator (not interpreter) in the state and do not have offices, sales staff, employees — nothing — located there.”

The writer goes on to note that states are receiving less federal funding and doing everything they can to make up the difference so it will be no surprise if other states follow the Michigan and Texas examples. Without a doubt, the filing requirements on small business are burdensome and becoming worse. The LSP had its counsel review the laws. Aren’t other translation companies doing the same thing? Don’t corporations employing freelancers face the same issue?

In short, yes. U.S. tax law requires that companies issue a Form 1099 to any contractor to whom they pay more than US$600 per year. Not only are there tax implications, but some states have workmen’s compensation and unemployment insurance requirements as well. And there’s also the question of how much of a contractor’s income comes from a single company — if a state’s revenue department can make the case that the company is the majority source of income, that consultant could actually be an employee. We expect this to become more of an issue as states try to get out of the welfare, health insurance, and unemployment business — and fill depleted state coffers. No surprise: It’s not just an American issue — wherever you’re located, if you employ freelancer translators, you should check your country’s tax code.

Disclaimer: Our accountant says that the tax information in this blog posting is “roughly correct.” He told us that the nexus and employee/subcontractor issues are complicated by a number of factors, the rules vary state by state, and the Federal government has its own set of rules. As a CPA, he said, “I would have to lengthen the blog by about five pages and include a multitude of disclaimers and references.” Bottom line: Ask your accountant if you’re doing the right thing.