So….how much barter really is too much?  Ultimately that is an indiviual question.  I’ve heard people in the industry throw out recommended percentages as rules of thumb… 5% of your total sales; 10%, 15%.  It’s nice to have a number to put out there for newbies but I really question the accuracy of any general number like that applied across the board.

First off I should point out that 99% of the traders out there that think that they can’t handle more trade are probably wrong.  It’s not that they have too much trade, it’s that they are not good enough at trade to take advantage of more trade than they are currently conducting.  I don’t mean this as an insult.  It applies to myself as well.  Right now I have more of one partcular barter currency than I need and I’ve (for the most part) stopped accepting that currency.  Does that mean that I have too much?  Maybe.  Or it could mean that I simply have not yet figured out how to use that currency to my advantage well enough.

Occasionally I hear a story about someone who supposedly lives on 90 to 95%  barter income.  Frankly I find this very difficult to believe.  As much as I love barter,  there are some things that you have to pay for in cash.  Taxes for example.  The IRS won’t take a chicken as payment.  Plus, trying to barter for absolutely everything you need would be a lot of work.  I’m not convinced that one person would have enough time to in  a normal work week to find all the trades they need to make it on 95% barter income.  I’d also point out that because setting up a trade takes a while, even if you have enough time in your week, that doesn’t help you with an immediate need you might have in the next hour.

I just checked over my records for 2010 and it looks like about 35% of my income was on trade.  I don’t know about you, but that number is a little scary to me.  I love to trade, don’t get me wrong, but it is unsettling to me that I am that dependent on barter.  It means I really need to be motivated to find good trades for things that my family needs.  If I don’t find those trades, my income goes down substantially.

Of course, it’s not like I’m decreasing my cash sales in order to take on barter sales.  All barter sales are in addition to the cash sales I was going to do anyway.  So from that point of view, the percentage doesn’t really matter.  Barter does not replace my cash slice of the pie.  It helps me have a bigger pie.

I realize it’s a somewhat personal question, but I would be very interested if folks would post back a comment on this article and let me know what percentage of their income is in barter and how they feel about that number.  Feel free to post autonomously.

There are a couple recurring concepts that I’ve run into about barter that I’d like to address.  For those of you that have been around the block, you already know these.  That being said, I hope this article will still be valuable as you can refer the uninitiated to it.

1. Barter is NOT a tax dodge
   The IRS does not mind if you barter at all.  That’s because all of your barter income is taxable.  You are expected to report all barter sales on your income taxes.  This on is a slam dunk as far as documentation goes.  Here is a direct quote from the irs.gov website:
   Topic 420 – Bartering Income
   Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received.
   Generally, you report this income on Form 1040, Schedule C , Profit or Loss from Business. If you failed to report this income, correct your return by filing a Form 1040X. Refer to Topic 308 for Amended Return information.
2. Barter is not illegal
   It may surprise you to hear that some folks out there actually think that bartering is illegal.  Usually this idea in some way is related to taxation.  I guess the belief is that some government agency has banned barter as a way to stop folks from skipping out on their taxes.  This is totally untrue.  Barter for any legal product or service that I’m aware of is totally legal.  What IS illegal is tax evasion.
   It’s not just income tax that can be an issue.  I once ran into a small farmer that I wanted to trade with that was convinced barter was illegal.  After asking some questions I figured out what the actual problem was.  Some years back they had traded produce for labor on their farm.  When this worker became unhappy with them they got into a lot of trouble for illegal labor practices.  The farmer failed to understand that the problem was not barter.  The problem was that this person was an employee, but they failed to follow local labor laws for this person.  It is perfectly legal to hire an employee and pay their net pay on barter, but you still have to pay state and local taxes and withholding in cash as well as have worker’s comp insurance ect. etc.
   I also find it interesting that even seasoned barter professionals often hold unfounded beliefs that certain industries are banned from barter.  I’ve been told by veteran barter professionals that industries like insurance, investment brokerages, and firearms sales all have special rules that limit or ban barter .  The problem is that every time I dig into the topic I can never find one shred of evidence either in statute or common law prohibiting or limiting barter in specific industries.  Of course I should point out that I’m not an attorney.  Please post back if you are an attorney and have some new information for our readers on this topic!

It’s important to understand these issues because part of your job as a good trader is to recruit new trading partners.  As you do that you will without a doubt run into the above objections and you need to be ready to answer them.  Of course now you can also give them a link to this article!

A great way to improve cash flow and decrease accounts receivable is to create your own barter currency.  This can be as simple as issuing gift certificates.  You might be amazed how many people you do business with might accept these as payment.  Of course this will always be easier with new vendors rather than ones that already expect cash from you.  It’s as simple as asking the person with authority if they would accept your gift certificates as payment.  Your barter exchange may also be willing to purchase gift certificates from you.

Of course, some services would be better suited than others for this type of trade.  For example, my primary business is web development.  Although the vast majority of businesses need a website, many of them already have a vendor in place and a website isn’t a consumable item that you need to re-purchase every month.  Not to worry if you are in that situation.  Here’s a cool twist on this classic concept:  You can use other people’s gift certificates as your own barter currency too.  For example.  My firm does web development with an online grocery store that specializes in organic food delivered to your home.  Because absolutely everyone has to eat, this is a perfect barter currency.  Right now I’m negotiating with a local butcher shop to build their website and I’m hoping to do the same thing with them.  My family does not need thousands of dollars worth of steak, but I sure do have a lot of friends in my barter network that would love to get their hands on some gift certificates for meat from this shop.

The one part I still have to work out is the actual certificates that will be used if I make a deal with the butcher shop.  Currently I’m thinking that I will have numbered scrip printed up for the butcher shop which each piece of scrip worth $10.  I can have them printed for the shop (on barter of course), they will pay me with them, then I will trade them away when I buy other items through my barter network.  The butcher shop is a big winner too because they will have many new customers come through their shop.  Hopefully once they spend their scrip they will come back and spend cash.

Of course I should mention that (regardless of what you use as currency) all sales need to be reported to the IRS.  Additionally, make it clear on your scrip that they are gift certificates and ARE NOT US currency.  None of us want to be talking to the secret service about counterfeiting.

I’ve often heard the complaint from unsuccessful traders that they can’t pay some of their most important expenses on barter.  If your business is anything like mine, a major expense is payroll and this article is about how I’ve lowered my payroll liability by hiring staff on barter.

The basics:
There are a few basics about hiring on barter that I should get out of the way right off.  Firstly, you of course are still responsible for all taxes, workers comp, and withholding just like you would a cash employee.  Also, in most cases it isn’t practical to try to hire full time staff on barter.  As much as I love barter, I can’t live off it 100% and that’s true for your staff too.  Lastly (and you probably already know this) it’s a pretty tough proposition to switch cash staff over to barter.

So that’s all the negative news; here’s the good news.  It can be very easy to hire new part time staff on barter.  The easiest way to do this is simply to find sub-contractors that can fulfill a needed position in your business that are already in your local barter exchange.  This is exactly how I hired my book-keeper.  He comes in for about 3 hours a week and does all our books.  I’ve never paid him a cent in cash.  Sub-contractors are also easy because you don’t have to worry about taxes/workers comp/etc.

I’ve also hired traditional employees on barter.  When I’ve done that I’ve usually found the employee by posting in the barter section of craigslist.  As I mentioned it needs to be a part time position.  I then pay all taxes/withholding etc in cash, but the net pay is paid in barter.  I have given the staff member the choice of receiving credit in a barter exchange account or having me carry the balance for them so they can use the credit throughout my entire barter network (of multiple exchanges and direct trade partners).  The key to it is that it always has to be a win-win for everyone.  If it’s not a good deal for your employee, then they will not stick around.