Small Business Barter Transactions Are Separate from Payroll

Entrepreneurs and small business owners, especially in the start-up stages, learn quickly how to balance getting things done with income.

Every business needs actual cash coming in the door, but sometimes small businesses move forward in their development through barter.

Barter is defined as the exchange of goods or services. The IRS still considers barter as income, but says there is usually no exchange of cash.

For example, a small business owner may need some electrical work done in his office or store. An electrician may need a service or product the small business owner can provide. Instead of actually hiring one another or making a purchase from each other, the two business owners trade the services or products. The electrical jobs get done and the electrician gets what he needs, too.

The IRS requires that this “income” be reported as part of the income tax filing annually.

Employers do not engage in “barter” with employees, at least when it concerns employment and wages. Employees receive their compensation through payroll. Payroll taxes are paid on that compensation by both the employees and employers.

While benefits and health care are items that may be processed through payroll and reported on pay stubs, barter is not. The income as a result of barter is reported on the year end tax return and reporting it is the responsibility of the parties involved. Likewise, it is possible that if you are in a trade or business, you may be able to deduct certain costs you incur to perform services that you barter. But again, this would not be processed through payroll services. And, just like all other expenses, must be documented and supported with receipts and other forms of documentation.

While The Payroll Department can make your payroll taxes and tax reporting for payroll happen seamlessly and without worry, they do not maintain records for any barter transactions. While that is the case, we always want you to be aware of tax requirements you might not know about, which is why we suggest you contact your accountant with questions or concerns you might have about barter transactions.

-Elaine of The Payroll Department Blog Team