Bartering is when two people exchange goods or services without the payment of money. It can be a parent fixing a child care provider’s car in exchange for some free child care. Another example can be a child care provider offering free child care in exchange for a parent helping her care for children.
When there is a bartering arrangement, both parties must treat the transaction as if money exchanged hands. This means you must report as business income the free child care services you are bartering. So, if you gave one week of free care and the cost of this care is normally $200 a week, you must report $200 as income on your Schedule C, because this is how much you would have received if cash exchanged hands.
What about the free car repair you received in exchange for the free child care? First, you must estimate the fair market value of the service you received. If you believe that the car repair is worth $200, then you may be able to deduct this amount under the normal rules of claiming business deductions. In other words, if you are using the actual expenses method of claiming car expenses you can include $200 with your other car expenses. If you use the standard mileage rate, you cannot deduct any car repairs.
If, instead, the parent had given you $200 worth of used toys (and your children are grown), then you could deduct $200 and there would be no tax consequence to this transaction.
If you barter with someone you should keep records to show the services you provided and the services you received. Make a note that you received $200 as “Barter Income” and record $200 expense as “Barter Toys”.
As you can see, there is no real tax benefit to bartering.
If you barter for free child care in exchange for help with children in your care, watch out! You must treat the value of the bartered services as wages. If you would normally pay someone $300 a week to help you care for children, you must treat the $300 as if you were paying this amount in wages to this worker. That means you have to withhold Social Security/Medicare taxes and withhold federal and state income taxes. You may even have to pay state unemployment taxes and purchase workers’ compensation insurance! Yikes! As you can see, this gets complicated very quickly. Here is my article that discusses your responsibilities as an employer.
I recommend that you don’t barter in exchange for someone helping you care for children.
Get more information on bartering from the IRS.
Image credit: blog.zagat.com
For more information, see my book Family Child Care Record Keeping Guide.
Copyright 2011, Tom Copeland, www.tomcopelandblog.com