Starting Trouble with the IRS - Working Under the Table Can Destroy Your Business

Freedom from the average... One of the major advantages to being your own boss is that you can sometimes bend the rules. "Handshake deals" and "Under the table" payments are common, especially between small business owners and/ or independent contractors. I know these seem like easy ways to work within small business circles, and a mutual barter system is the norm. However the IRS looks for these sorts of deals and comes down hard on the business owner or contractor if they find out about them.

What the IRS expects...The IRS doesn't care about those arrangements, because they want you to report on every little amount you earn, and every little amount you spend. If the IRS finds out you've been doing a substantial amount of work, "under the table" they will audit you so fast it will make your head spin. According to the IRS, bartering for property and services counts as income. To better explain this, I will give you an example of how the IRS expects you to report barters. If you make an agreement with your landlord to do repair work in lieu of rent, you must count the amount of rent as income for your services. Your landlord must also report the value of your work as rental income.
What works out best...If you do not report these things and the IRS audits you, they will use the fair market value of these services. You could wind up with a much higher tax debt than if you had reported the bartering on your tax returns. In addition to this, some of these handshake deals could be counted as business expenses.
The next time you barter one good or service for another draw up a contract. State the terms just as you would any other business transaction. That way you both will report your income correctly, and be able to claim the value of the "payment" as deductions. That way everyone wins.