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Bartering Professional Services
Manage episode 491710280 series 3527542
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In this episode, host Molly Beyer discusses the practice of bartering, a form of trade that’s been used since before money was invented. However, there are important things to consider before simply jumping into a trade arrangement, such as the specifics of accounting and tax considerations. Molly walks us through the benefits and potential drawbacks of bartering professional services and highlights some best practices so our exchanges are fair.
The benefits of bartering can be a win-win because the exchange of services conserves cash flow, which, especially for new entrepreneurs or small business owners, is a critical consideration. It also makes use of excess capacity, such as time in our schedules or underutilized resources. Bartering also fosters good long-term connections and bolsters affiliate partnerships. Molly explains the value of each benefit.
The challenges and potential downfalls are also addressed by Molly, and they include unequal value exchange, tax implications, and record-keeping and accounting burdens. Each of these drawbacks is examined in detail by Molly, with cautions and advice on how to avoid them included. Successful and unsuccessful barter relationship examples are detailed, leading to vital takeaways designed to help all entrepreneurs set up balanced and positive bartering partnerships.
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Transcript
Molly 0:08
Hello. I am Molly Beyer, host of the Ambiguous &: Business Basics and Beyond, a podcast where we have frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success. There are so many ands that impact being your own boss. Join us as we explore all these ands and more. Like, subscribe or follow wherever you get your podcasts, and let's explore these ambiguous ands.
Speaker 1 0:39
Hello and welcome to the Ambiguous &: Business Basics and Beyond. I'm your host, Molly Beyer, and I am here to lead you through frank and holistic conversations on the basics of business. Today, we're going to look at an age old practice that is making a big comeback, bartering. Bartering is a form of trade that's been used since before money was invented, and it can be a really powerful way to exchange value without exchanging cash. But before you jump in, there's some really important considerations, especially when it comes to the accounting and tax side of things. So today we're going to talk about the benefits of bartering professional services for business owners, the drawbacks and potential pitfalls of bartering professional services, the accounting and tax implications that you need to be aware of, and some best practices to ensure a smooth and fair exchange. So let's get into it.
1:34
First, we're going to talk about the benefits of bartering so bartering can really be a win-win for professionals who are looking to exchange services without impacting their cash flow. Here's why: Because it conserves cash flows, especially if you're a small business owner or newer entrepreneur, your cash flow is critical. So instead of spending your money on a service, you can trade something of equal value, keeping more of that cash available in your business. An example of this could be a graphic designer who trades logo design services with a copywriter for website content, so both are receiving valuable services without actually spending that money. Another benefit is that it can utilize excess capacity. So if you have time in your schedule, or you have underutilized resources, bartering that turns it into value. So this can be really useful for service based businesses, like coaches, consultants and freelancers. Like a massage therapist has a slow Tuesday afternoon, and they can trade sessions with a business coach who needs some stress relief. It also builds stronger business relationships, and we've talked about the importance of business relationships and partnerships. Bartering really creates those really good long term connections, and again, brings potential referrals or affiliate partnerships. Many barter deals evolve into some sort of paid relationship, once more trust is built or cash flows do increase. An example could be an accountant who is helping a web designer with tax prep, and then the web designer sends paying clients down the road. It also gives you access to services you might not be able to afford otherwise, because some services just may be out of your budget for a small business, and bartering can make them accessible for you. So these are great options for businesses that are just starting out. So maybe a photographer going on their own, can trade some of their product photography for some social media marketing help.
3:27
You also have the benefit of no interest or loan obligations. So if you know, when you have to take out a business loan or you're making a purchase on a credit card, there's interest, there's debt, there's monthly payments. Bartering doesn't come with any of that. So let's talk about some of the drawbacks, because those seem like some pretty good benefits.
3:48
So yeah, bartering does have its perks, but there are some pretty significant challenges, especially from that accounting standpoint, that you really want to be aware of before you walk into one of these relationships. The first is unequal value exchange. One of the biggest issues in a bartering relationship is determining what the fair market value is for the sort of goods or services that you are bartering with. So if one service takes more time or has more expertise involved, one of the parties might feel short changed, and that's going to cause some bad feelings. So an example of this could be a marketing consultant who's trading social media management for some legal services. The legal work takes half the time as the marketing task. So is that fair? So one of the things you want to do is always agree on value in advance, so that you're avoiding any misunderstandings.
One of the second downfalls is tax implications, because yes, bartering is taxable. This is where a lot of people get tripped up. So the IRS considers barter transactions as taxable income, and so do most states. Even if no cash is exchanged, you have to report the fair market value of goods or services that you received as income. So if a web designer trades a $3,000 website for legal services with an attorney, both of those parties then have to report that $3000 as income, even though no money actually exchanged hands. So you really need to track all of your barter transactions, just like you would track any cash transactions.
The third downfall is the accounting and record keeping burden. Again, those services have to be recorded properly in your books and on your tax returns. So you need to be invoicing, tracking the fair market value, and you have to also potentially issue 1099 forms. So if you're bartering with another business and they receive more than the 1099 threshold, which is $600 at the time of recording this, then you also might need to issue them a 1099 NEC for the services that they provided. So a good tip here is to work with an accountant or bookkeeper to really ensure that you have compliance with tax reporting, if you are doing bartering ...
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