Bartering is the exchange of goods or services for the goods and services offered by someone else. Money typically doesn’t change hands, provided the value of the exchange is deemed equivalent. Bartering can be a good way to get experience when you’re just starting out, fulfill a need without a financial investment, expand your network and find new business.
While it can seem like an informal situation, there are potential damaging consequences that can occur if you don’t do certain things to protect the bartering arrangement. Here is a checklist of the most important steps you should take before beginning a bartering relationship.
Evaluate the Value
You want to make sure the arrangement isn’t lopsided, and that both parties are getting what they put into it. A mismatched barter can result in resentment, frustration and potentially even legal issues. To start, assign a dollar value to the goods or services that are to be traded. If there isn’t an even comparison, adjust the trade to make it comparable (i.e. trade 5 hours of a service A for 8 hours of service B).Check References
Do your research into the person you’re considering bartering with, just as you would if you were hiring them to do something. Ask for references, check past work, dig into who they are and verify they have the skills and experience they are claiming. Just because bartering doesn’t involve money doesn’t mean it should imply discounted or less professional services, and you’ll save yourself a huge headache by verifying this in the early stages.Use a Written Agreement
Again, just like any other business relationship, you should have a written agreement that explicitly outlines the terms of the arrangement. This is especially important when there isn’t a clear one-for-one exchange. Your agreement should outline the scope of the work on both sides, identify the deliverables, specify the duration or deadline for the work and spell out what happens if either side wants to end the arrangement before completion.Keep Open Lines of Communication
Stay in the loop with your bartering partner to ensure that the trade is effective and that both sides are happy with the service they’re getting. If something isn’t working out as expected, or if you’re unhappy with the work you’re receiving, speak up and work toward a resolution. It’s also a good idea to schedule regular check-ins and milestones to make sure the bartered services don’t get dropped below paid work and forgotten.Don’t Forget About Taxes
The rules for reporting barter transactions may vary depending on which form of bartering takes place and where you are located. According to the IRS, in the U.S. barter dollars are identical to real dollars for tax reporting, so you need to treat barter income as you would any other business activity. Keep good records and consult an accountant if you have questions or need advice. Do you barter your services? What advice do you have? Image credit: dlnnyFrequently Asked Questions about Bartering Considerations
What are the tax implications of bartering?
Bartering transactions can have tax implications. The IRS considers bartering as taxable income. Both parties involved in the barter must report the fair market value of goods or services received as income on their tax return. It’s important to keep detailed records of all bartering transactions for tax purposes.
How is the value of goods or services determined in a barter transaction?
The value of goods or services in a barter transaction is determined by the fair market value. This is the price that a buyer would be willing to pay and a seller would be willing to accept in a competitive market. Both parties should agree on the value before the transaction takes place.
What is a barter agreement?
A barter agreement is a legal contract between two parties that outlines the terms and conditions of the barter transaction. It includes details such as the goods or services to be exchanged, the value of the exchange, and the time and place of the exchange. It’s recommended to have a written agreement to avoid any misunderstandings or disputes.
What are some examples of barter transactions?
Barter transactions can occur in many forms. For example, a graphic designer might exchange their design services for legal advice from a lawyer. Or a farmer might trade a portion of their crop for mechanical work on their farm equipment. The key is that both parties agree on the value of the goods or services being exchanged.
Can bartering be used in business?
Yes, bartering can be used in business. It can be an effective way to conserve cash, move excess stock, or make use of idle production capacity. However, it’s important to consider the tax implications and to have a clear barter agreement in place.
What are the benefits of bartering?
Bartering can have several benefits. It can help conserve cash, get rid of excess stock, and make use of idle resources. It can also help build relationships with other businesses and potentially open up new markets.
What are the challenges of bartering?
Bartering can also have its challenges. It can be difficult to find a suitable barter partner and to agree on the value of goods or services. There can also be tax implications and potential legal issues if a barter agreement is not properly drafted.
Can bartering be used in international trade?
Yes, bartering can be used in international trade. This is often referred to as countertrade. It can be a useful strategy for doing business in countries with foreign exchange restrictions or in situations where other forms of payment are not feasible.
How does bartering affect the economy?
Bartering can have various effects on the economy. On a micro level, it can help businesses conserve cash and make use of idle resources. On a macro level, it can stimulate trade and economic activity, particularly in times of economic downturn.
Is bartering legal?
Yes, bartering is legal. However, it’s important to be aware of the tax implications and to have a clear barter agreement in place. It’s also important to ensure that the goods or services being bartered are legal and ethically sourced.
Alyssa GregoryAlyssa Gregory is a digital and content marketer, small business consultant, and the founder of the Small Business Bonfire — a social, educational and collaborative community for entrepreneurs.
