"Should I barter services with my brother-in-law?"
A new business owner asked me this question a couple of days ago, as she is considering hiring her brother-in-law to put together and host a web site. She is trying to keep her costs down because she couldn't get a bank loan, and she's starting, literally, on a shoestring. She doesn't want to pay for anything that isn't absolutely necessary, until she has enough income from customers. So she's looking for ways to get things done without extra expense.
What is barter?
Barter is a non-cash exchange of products or services between businesses. In other words, it's "you do this for me, and I'll do that for you." Barter is a legitimate way to do business, saving both parties money while giving each of them valuable services or products.
Before You Enter Into a Barter Relationship
Before you engage in barter, be sure you consider these factors:
- Barter transactions are income to one party, an expense to the other. And vice versa. Both parties must report both the expense and the income. Sure, it might be no net effect, but the value of one service might be more than the other.
- Tax Implications. While barter is a legal way to do business, barter is considered taxable by the IRS. The IRS says: "Barter dollars or trade dollars are identical to real dollars for tax reporting."
- Barter transactions may affect other taxes, including self-employment taxes, employment taxes, excise taxes, and state sales taxes. For example, a bartered item still includes the same sales tax liability as if the item were sold to a paying customer.
- Reporting barter transactions. You must report barter transactions annually on Form 1099-B, along with other 1099 forms, both to the recipient and the IRS.
- Keep good records on barter transactions. The requirement to keep good records is just as important for barter transactions as for other business transactions. Record the income from each transaction, including date, amount (fair market value) and what it was for. Also record your expense for the transaction, along with the same information.
- Consider a barter exchange. If you like bartering, you can join a barter exchange, where you can be connected with other companies for the purposes of barter, and the exchange helps with the reporting paperwork (for a fee, of course).
Barter is an excellent way to save on costs during start-up and to help you get referrals from other business owners. Just be sure you treat barter as you would any other business transaction.
For More Information
More Details About Barter, Taxes, and Recording Barter Transactions