Why this matters

The IRS requires taxpayers to report all income—whether cash, check, barter, or in‑kind. Failing to report the fair market value of goods or services you receive can lead to back taxes, penalties, and interest. This guide explains which forms apply, how to value noncash payments, where to report amounts on individual and business returns, and practical recordkeeping tips.

Authoritative sources

Who must report barter and in‑kind income

  • Self‑employed individuals and businesses who receive goods or services in exchange for their goods or services must include the FMV of what they received in gross income and on self‑employment tax calculations when applicable.
  • Employees who receive noncash compensation from their employer should have those amounts treated as wages and reported on Form W‑2, subject to payroll taxes.
  • Barter exchanges (third‑party organized exchanges) typically report transactions to participants and the IRS on Form 1099‑B.

Key reporting rules at a glance

  • Value: Report income at fair market value (FMV) — the price a willing buyer would pay a willing seller in an arm’s‑length transaction.
  • Individual reporting: If you’re self‑employed, include barter or in‑kind receipts as gross receipts on Schedule C (Form 1040). If not in a trade or business, report as “Other income” on Schedule 1 (Form 1040), line 8 (or the line indicated in current year instructions).
  • Self‑employment tax: If the barter income is from your trade or profession, you generally owe self‑employment tax on that income in addition to income tax.
  • Information returns: Barter exchanges use Form 1099‑B to report transactions (see IRS bartering page). Payments for services to nonemployees of $600 or more still generally require reporting on Form 1099‑NEC, even if paid in property or services — check current 1099 instructions for exceptions and thresholds (IRS). See IRS guidance: https://www.irs.gov/instructions/i1099nec

Determining fair market value (FMV)

FMV is the amount at which the property or service would change hands between a willing buyer and seller. Practical methods to determine FMV:

  • Use your usual selling price. If you typically charge $100 for a service, that is a reasonable FMV.
  • Compare similar local market rates or published price lists.
  • When exchanging goods, use the price you would sell the item for if you were to sell it to the public.
  • If one or both parties are businesses with established price lists, those prices are strong evidence of FMV.

Document how you arrived at FMV in case of IRS questions: invoices, price lists, email agreements, or marketplace listings.

Where to report barter and in‑kind income

  • Schedule C (Profit or Loss from Business): Most self‑employed taxpayers report barter income in gross receipts. Deduct ordinary and necessary business expenses as usual; cost of goods sold rules apply when inventory is involved.
  • Schedule 1 (Additional Income and Adjustments): If the in‑kind payment is not from a business activity, report it as other income per instructions for the tax year.
  • Form 1040 (Wages): If you are an employee and receive noncash pay from your employer, it should be included on Form W‑2 as wages and reported on Form 1040.
  • Form 1099‑B: Barter exchanges issue 1099‑B to members to report the value of exchange transactions. Use the 1099‑B as a crosscheck to your records.
  • Form 1099‑NEC: If you pay an independent contractor in goods or services that equal $600 or more, current 1099 guidance generally requires you to report nonemployee compensation on Form 1099‑NEC (see IRS instructions).

Examples

1) Freelance web developer
You design a website for a photographer and receive a portrait session valued at $1,200. Report $1,200 in gross receipts on Schedule C and pay self‑employment tax on that amount.

2) Small business swap through a barter exchange
A bakery provides $4,000 of catering to members of a barter exchange. The exchange issues a Form 1099‑B showing $4,000 of barter proceeds to the bakery. The bakery reports $4,000 in business income and deducts any related business expenses.

3) Employee receiving goods as compensation
An employee receives a $500 gift card from their employer in lieu of a bonus. This is wages and should be reported on Form W‑2 and is subject to payroll taxes.

Common mistakes and how to avoid them

  • Under‑valuing barter receipts: Taxpayers sometimes understate FMV to reduce taxes. Keep contemporaneous documentation showing how FMV was set.
  • Failing to pay self‑employment tax: If barter income is business income, you still owe self‑employment tax. Include it on Schedule SE when required.
  • Ignoring information returns: If you receive a Form 1099‑B from a barter exchange, reconcile it with your records. If you receive a 1099‑NEC or should have issued one, follow the information‑return correction procedures in IRS instructions.
  • Treating everything as barter when one side is an employee relationship: Payments from employers should be treated as wages.

Recordkeeping best practices

  • Create a barter log with: date, counterparty name, description of goods/services exchanged, FMV, supporting documentation (invoices, photos, price lists), and how you determined FMV.
  • If you operate through an account on a barter exchange, download and save transaction reports and any 1099‑B forms the exchange provides.
  • Keep receipts for expenses related to bartered goods or services so you can claim proper deductions.

Correcting missed or underreported barter income

  • If you discover you didn’t report barter income, amend your return using Form 1040‑X and attach corrected schedules showing the income and any additional tax owed. Keep supporting documentation handy in case of audit.
  • If the IRS contacts you about an information‑return mismatch, respond promptly and provide reconciliations between your records and the third‑party form.

Tax planning considerations

  • Track barter activity during the year to estimate quarterly estimated tax payments if you expect to owe self‑employment tax or income tax.
  • If you barter frequently, consider pricing your services so FMV and cash prices are consistent to simplify valuation.
  • Discuss barter transactions with your CPA or tax preparer so they can advise on potential deductions, inventory treatment, and payroll implications.

Professional tips from practice

In my practice, I’ve seen freelancers underestimate the FMV of traded services because they value the noncash benefit less emotionally. Treat barter receipts as if you’d been paid in cash: record the FMV immediately, and enter it into your bookkeeping. When a barter exchange issues a 1099‑B, reconcile line‑by‑line to avoid IRS notices.

Helpful FinHelp resources

Bottom line

Barter and in‑kind income are taxable and must be reported at fair market value. Correct reporting depends on whether the transaction is business income, wages, or a barter exchange distribution. Keep careful records, value transactions consistently, and consult a tax professional when transactions are complex or when information returns are involved.

Disclaimer

This article is educational and does not replace personalized tax advice. For guidance tailored to your situation, consult a CPA or qualified tax professional. See IRS guidance on bartering for official rules: https://www.irs.gov/businesses/small-businesses-self-employed/bartering