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Business success is dependent on a solid financial foundation & success looks different to everyone & there is a lack of equity of access to resources and information for small business owners and independent contractors & there is a societal narrative making us believe “balance” is our ultimate goal & … There are so many “&”s that impact being your own boss. Let’s have some frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success.
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 services. Maybe you can even barter your services with a bookkeeper or an accountant, though they might not do it, I don't barter services. Another downfall could be it may not be a good fit for your business needs, because sometimes the services that are available for you to barter aren't just ones that you actually need right now.
6:19
You also might feel pressured to take on a barter deal because it's available, even though it's not really a good strategic option for your business. So the tip there is really only barter things that are really going to benefit your business. Another potential downfall is that it can lead to disputes. If your expectations aren't clear, then you can get those misunderstandings. So you know, unlike a paid transaction, where there's actually some legal protection, in an informal barter agreement, there you don't really have a leg to stand on. If you have, like, a photographer taking headshots with a marketing consultant, and the consultant is always unhappy with the final photos, you know, how do they resolve that issue? Like, how do they get what it is that they need when they provide their service that they agreed to? So this is really where having a written agreement outlining those expectations, timelines and how you're going to resolve any disputes. So basically, have an engagement agreement with them, just like you would with a paying client. And I have to fulfill my ADHD desire for bonus content. I really love examples to stimulate creativity. So before I'm jumping into some best practices, I want to share some successful and unsuccessful barter examples, because I think it's going to really help understand what good situations are and what bad situations are, and maybe also stimulate some of your ideas of who you could talk to about barter relationships.
7:38
So some successful barter relationships could be a marketing consultant and an accountant, where the consultant needs help with bookkeeping and tax preparation, and the accountant needs help with branding and website SEO. So they're agreeing to then exchange services of equal value. The accountant provides the bookkeeping, tax filing and the marker revamps the accountants online presence, so they're both getting that high value service that they need without spending that money, and then later they become paid clients for each other. So those are some Win Win situations.
A really great barter relationship can be in personal health and wellness services. So like a personal trainer and a chiropractor, the personal trainer is working with clients who has mobility issues, and the chiropractor is looking for clients interested in spinal health and injury prevention, so they can barter, where the trainer receives free adjustments and the chiropractor receives personal training sessions so that they can both grow their businesses, because they're referring to each other's clients, and they know the services that they are referring out as well, leading to Long Term paid referrals.
8:41
Another one. We're looking at these event chains as well as a wedding photographer and a florist to expand their client base. The wedding photographer and the florist can agree to trade some services for a stylized photo shoot. The florist provides the arrangements for the shoot. The photographer captures the high value images that the florist can then use for marketing. So both of them are gaining valuable marketing materials, exposure to each other's networks, and they can secure more bookings from the clients who see this stunning collaboration in action.
9:12
Another one could be like an IT consultant in a co-working space. These are like ongoing partnerships where the co-working space needs IT support for its Wi Fi network and security system, and the IT consultant needs office space to work with their clients, so they agreed to trade that IT support for office space membership. So that IT consultant gets a professional space, and the co working space gets to save on its IT costs. So these deals can last for a long time before they transition as well to a paid agreement for services.
9:44
Some unsuccessful bartering examples: a social media manager and a restaurant. So here we're talking about an unbalanced trade where a social media manager agrees to run a restaurant social media in exchange for free meals. However, managing content, responding to reviews, and creating posts takes way more time each month than the value of the meals that they were trading for. So the Social Media Manager starts to feel overworked and undervalued, and they get really frustrated. And so deals fall through sooner, and it can lead to long term bad feelings, and instead of referrals actually dissuading people from using products or services.
10:24
Another unsuccessful one, a graphic designer and a startup. So this is what happens when we have some undefined expectations. A graphic designer agrees to create branding materials for a startup in exchange for free exposure. That free exposure is always a hard one, so be careful of that. And a percentage of future profits. The startup, though, never became profitable, so the designer never received compensation for their work. So the designer puts in dozens of unpaid hours with no return, and we need to remember then that exposure is not a form of payment, and profit sharing is risky in barter deals, especially with startup businesses with unconfirmed cash flows.
11:03
Another unsuccessful relationship involves scope creep issues. So a photographer and a personal stylist, the photographer trades headshots with the personal stylist in exchange for wardrobe consulting. However, the stylist keeps requesting extra photo shoots, beyond what's initially agreed upon, so the photographer then starts to feel taken advantage of, and since there's no written agreement, it was difficult then to set boundaries. Again, leading to some tough feelings here on each side.
11:29
And our final unsuccessful one that we're going to talk about is an accountant and a fitness coach. An accountant exchanged tax services with a fitness coach for personal training sessions, but neither party reported the barter income to the IRS. This is a bad accountant, and the accountant faced a tax audit that uncovered the unreported transaction, so the accountant had to pay back taxes and penalties. This also can lead to bad outcomes for the person who didn't get audited, because often, when you start to talk about those trails, then it determines that that other person's business is not doing what they're supposed to do, and it leads to audits for them as well. So bartering is taxable. The accountant should have known this, so you have to be keeping those records because it, yeah, it's more than hard feelings, it's more than overworking. There could definitely be some significant legal issues in there as well.
12:19
So a couple of our takeaways from these examples. Successful barter deals work when both parties are agreeing on that fair market value, when there is clear communication on the deliverables, when both services are equally useful and needed, and when there is that written agreement outlying expectations. Unsuccessful barter deals happen when the exchange is unbalanced or one sided, when one party is working more than the other on the deal, when it is not clearly defined, leading to some scope creep, or when there's tax and legal implications that are being ignored. So if you are going to tread into this arena, we want to use these best practices. Again determine that fair market value. Research what both services would cost in the open market, and agree on that equal value exchange before moving forward. If you have services already priced, charge in your barter what you would do for a paying client, and keep your records for tax and accounting compliance. Issue invoices for the full value of the services exchanged. Track those barter transactions in your accounting software. If you're using an online accounting software, it's probably going to be something like a journal entry. Again, ask a qualified bookkeeper or accountant to help you get that set up. Also use written agreements. Outline the services timelines, deliverables and what happens if somebody doesn't follow through. This protects both parties. You're going to do this just like you would with a paying client. Even a simple agreement in, you know, in email can prevent disputes. Just don't do it, just handshake or word, you know, talking to each other about it. Know your tax obligations, especially if you're an accountant. You want to report that barter income on your tax return. It's going to be generally scheduled C for sole proprietors and again, IRS and most states consider barter services as income, so you have to report it everywhere that you need to report your income. And if you're bartering with another business, you also want to make sure you know if you need to issue them a 1099, at the end of the year for the services that were provided. Also, finally, make sure it's the right fit. Don't barter just for the sake of it, and choose barter partners whose services you genuinely need and people that you trust.
14:39
So is bartering professional services a smart move for your business? Well, it depends. So if you need to conserve cash, if you want to build relationships or have access to those valuable services, it can be a great tool. But again, if you don't track it properly, you could face tax or legal issues. You have accounting headaches, you have disputes. So if you are considering bartering, ask yourself, Is this a high value exchange or an equal value exchange? Have I accounted for those tax and legal implications, and do I have a clear agreement in place? At the end of the day It can be a powerful strategy if it's done right.
15:17
Thank you so much for hanging out with us today. We'd love to hear your feedback on today's episode as well as any requests for future content. Drop a comment or suggestion and join us next time for more frank and holistic conversations on the basics of business. Please also like, subscribe or follow so you never miss an episode and until next time. I'm Molly Beyer, and this has been the Ambiguous &: Business Basics and Beyond. Have a wonderful day.