Q I have a landscape business, and I trade services with my mechanic. We agree that, over the course of the year, the value of our services is equal. Since it is a “wash”, do I have to include anything about this on my tax return?
A Yes. The IRS considers this barter income, and even though the transaction was a “wash”, you must both include the fair market value of the services as income.
Bartering is an exchange of one taxpayer's property or services for another taxpayer's property or services. The fair market value of property or services received through barter is taxable income.
Usually there is no swap of cash. Barter may take place on a direct, one-on-one basis between businesses and individuals, or it can take place on a third party basis through a modern Internet barter exchange.
If you engage in the direct barter of products or services with an individual or a business you will generally not receive a Form 1099-B, but the transaction must be accounted for in your books and records just the same. For example, if a doctor agrees to give an accountant a personal medical exam in exchange for personal tax return preparation, the fair market value of the medical exam is taxable to the accountant, and the fair market value of the tax return preparation is taxable to the doctor.
Barter can be used as compensation, too. A business can “pay”3 bartered goods or services as a bonus or as part of a compensation package to employees, partners and contractors. For example, a business may “pay” bonus or sales incentive programs with compensation including such items as vehicles, restaurant certificates or resort trips.
Barter used as compensation is deductible to the payer as an expense, but it is subject to employment taxes and information reporting. Barter used as a bonus or compensation for an independent contractor must be included on the contractor’s Form 1099-MISC, Miscellaneous Income, as non-employee compensation, and all barter compensation for employees must be taken into account on their Forms W-2. Barter compensation is subject to FICA, FUTA, and federal income tax withholding.
