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Our friends and we have an informal agreement that we will babysit eachother's kids when necessary. We don't pay any cash to each other for the service, but we agree to "repay" by providing the same favor.

An accountant friend told me just recently that our arrangement is actually a form of barter and may be taxable. It seems that bizarrely, he might be correct. I can't imagine the IRS finding out about our babysitting group, but I like to follow the law, no matter how outrageous.

I'm curious to get some more input.

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CodyBugstein
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    Your accountant friend... is perhaps the sort of person people think of, when someone says "an accountant". – Grade 'Eh' Bacon May 25 '21 at 20:04
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    I don't think barter includes mutual favors in a non-professional setting. The page you link to is heavily focused on businesses exchanging services they otherwise do charge for. The fact that any of you could charge each other does not seem like enough to establish that you are involved in barter. – chepner May 25 '21 at 20:27
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    @chepner Would it change then if one of the friends does in fact babysit professionally as well ? – CodyBugstein May 25 '21 at 20:37
  • There it starts getting gray. But if the friend is the only one that does so, and no body else in the group is providing them services in their own profession in exchange, it still doesn't feel like bartering to me. I won't comment more, since I think anything I'd have to add is covered by DJClayworth's answer. – chepner May 25 '21 at 22:00
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    "What the IRS doesn't know of cannot be taxed" – sam May 26 '21 at 04:50
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    @sam that is exactly the scenario that the OP excluded. I agree that this is likely something that is below the typical, day-to-day IRS threshold for investigation or prosecution. The question is whether if the IRS found out about it (with full details laid bare before them), they would treat a tax return that excludes it as incomplete, false or fraudulent. So, is this truly nontaxable according to the letter of the law or is it like speeding one mile per hour over the limit - illegal but unenforced? – Robert Columbia May 26 '21 at 12:20
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    Is your accountant friend going to report you? Maybe you should stop telling them such miniscule details. I do not know a single person in the history of forever that would claim babysitting services on their taxes unless they had a registered business. This accountant sounds like the "ackchyually guy" meme or someone that says "technically correct is the best kind of correct". – MonkeyZeus May 26 '21 at 14:22
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    Why do you even ask this? Do you think the irs really knows or cares? – JonH May 26 '21 at 16:57
  • "What the IRS doesn't know of cannot be taxed"—but unless the program has been changed, IRS offers a five hundred dollar reward for informing them of people evading taxes. – WGroleau May 26 '21 at 17:54
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    Imagine getting tossed in prison for this. A tough hombre looks you over and says, "I'm in here for MURDER! What're you in here for?" You look down and quietly say, "Babysitting". Tough guy moves away... – Bob Jarvis - Слава Україні May 27 '21 at 02:25
  • Well technically tax fraud is tax fraud so there is no reason why someone who uses babysitting to commit tax fraud should be treated better than someone who abuses government EV rebates. – CodyBugstein May 27 '21 at 02:33
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    @CodyBugstein while your sense of equality and fairness is commendible, in practice courts and government departments will take size, impact, and motivation into account. An honest mistake over infrequently used rules like your example will be treated differently to a group of businesses deliberatiely creating a barter cartel for the sole purpose of evading taxation – coagmano May 27 '21 at 03:19
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    @FredStark " in practice courts and government departments will take size, impact, and motivation into account" Is that written into the law anywhere? – CodyBugstein May 27 '21 at 16:46
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    Kinda, it's written into case law and common law. So it doesn't form part of the legislation itself, but the results of previous cases where these common law principles have been used are written down and used in the interpretation and application of the law – coagmano May 28 '21 at 00:11
  • I personally know someone (friend of my dad) who was prosecuted hard on a technicality, even though the amounts were really quite small. He maintains that it was done by an old enemy of his working in the local Attorney Generals office. So if it's not in the law, you don't really have any protection and the govt can decide to come after you for what ever reason (i.e. maybe a competitor wants to distract you from running your business, etc) – CodyBugstein May 28 '21 at 00:16
  • Hi Joan! – Paul D. Waite May 28 '21 at 15:05

2 Answers2

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I wouldn't worry about it.

This is from the IRS:Topic No. 420 Bartering Income

Bartering is the exchange of goods or services. A barter exchange is an organization whose members contract with each other (or with the barter exchange) to exchange property or services. The term doesn't include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis (for example, a babysitting cooperative run by neighborhood parents). Usually there's no exchange of cash. An example of bartering is a plumber exchanging plumbing services for the dental services of a dentist.

The part I bolded explicitly says that a small informal babysitting group isn't a barter exchange.

That saves a lot of tax forms.

The Internet has provided a medium for new growth in the bartering industry. This growth prompts the following reminder: Barter exchanges are required to file Form 1099-B, Proceeds From Broker and Barter Exchange Transactions for all transactions unless an exception applies.

Publication 525, Taxable and Nontaxable Income

Discusses bartering but the examples have more to do with barter exchanges and small business.

Bartering

Bartering is an exchange of property or services. You must include in your income, at the time received, the FMV of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as FMV unless the value can be shown to be otherwise.

Generally, you report this income on Schedule C (Form 1040). However, if the barter involves an exchange of something other than services, such as in Example 23, later, you may have to use another form or schedule instead.

Example 20.

You're a self-employed attorney who performs legal services for a client, a small corporation...

Example 21.

You're a self-employed accountant. You and a house painter are members of a barter club. ....

Example 22.

You're self-employed and a member of a barter club. ...

Example 23.

You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created....

mhoran_psprep
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    I'd note that the quote you get specifically addresses a babysitting cooperative; it may be worth emphasizing. – Matthieu M. May 26 '21 at 09:20
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    I put it in bold. Thanks. – mhoran_psprep May 26 '21 at 10:01
  • From the example, it seems like it applies when you are bartering professional services, or services related to your normal trade. If someone was a professional Au Pair, and agreed to babysit in exchange for some other services, that would be closer to being taxable. – Issel May 26 '21 at 17:35
  • I would strongly disagree with @MatthieuM.'s assessment. The quote does not specifically address a babysitting co-op, it uses a babysitting co-op as an example, and nothing more. The language is quite clear: " the informal exchange of similar services on a noncommercial basis" is what is covered. The OP's situation is in the clear - no forms necessary, no taxes due. Issel's comment (previous) reflects the IRS publications quoted more closely. E.g. such bartering is taxable if professional services or commercial properties are involved, or if a fair market value is set or agreed on. – Mark G B May 26 '21 at 18:43
  • That's not surprising, US government policy is extremely favorable toward self-help childcare. See also various business codes - small scale childcare operations get pretty much carte blanche. – Harper - Reinstate Monica May 26 '21 at 21:50
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    @CorvusB to me your comment seems to be making a distinction without a difference. "Specifically address a babysitting co-op" and "use a babysitting co-op as an example" serve the same function: to explicitly state that a babysitting co-op is excluded from barter-as-income concerns. Whether the co-op is a specific exclusion or an example of a general exclusion is not relevant to the question. – Tim Sparkles May 26 '21 at 23:16
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    @TimSparkles - Maybe, but they've got a good point that it's not defined through babysittingness, but rather by the similarity of the reciprocal services (i.e., X for X is excluded, X for Y taxed as barter). An irrelevant point for the OP, potentially useful for others. – Jirka Hanika May 27 '21 at 20:08
  • @TimSparkles "specifically addressing" and "using as an example" are worlds apart. In the first, the specific IS the point, and other items in the class are not addressed. In the latter, an example is merely that, a stand-in to help communicate a general class of possibly similar items. Nor do I agree that this point is irrelevant for the OP, although I would agree that it is not vital in the specific case of the OP. However, barter was indeed involved, and as such, the OP's question has general usefulness beyond the specific scope of the question, as an example in other cases of barter. – Mark G B May 28 '21 at 02:18
  • @TimSparkles And there is a larger reason I objected to MathieuM.'s assessment. If one were to take his statement as fact - that the IRS publication quoted specifically addressed babysitting barter, it would result in a gross misunderstanding of the actual language that is important for understanding the rule. Which consists of this statement: "the informal exchange of similar services on a noncommercial basis". – Mark G B May 28 '21 at 02:35
  • @CorvusB The text explicitly uses a specifically addressed example. It says nothing about the exclusivity of that example which appears to be the argument you are advancing. 'Specifically addressing' IS NOT the point, it is a commonly used, or easily adaptable example. Contrary to your last point, the actual language is important for defining the rule, the specifically addressed example is illustrative of (and therefore possibly important for) understanding the rule. There is no gross misunderstanding. – mcalex May 28 '21 at 07:05
  • @CorvusB I take it you don't practice tax profesionally? Because the 'order of operations' on how to assess tax treatment basically goes like this: (1) Is the legislation clear enough to avoid misinterpretation? (2) If not, is case-law [precedent set by similar cases that have gone through your jurisdictional courts] clear enough to avoid misinterpretation? (3) If not, is the written guidance from the tax authority clear enough to avoid misinterpretation? – Grade 'Eh' Bacon May 28 '21 at 13:27
  • For the lay-person who typically starts at step #3, if the tax authority gives you explicit guidance naming your situation precisely, you should be able to rely on it. This is such a case, where there is no grey area: baby-sitting co-ops are explicitly considered by the administration of the IRS to be non-taxable when run in the manner described by OP. – Grade 'Eh' Bacon May 28 '21 at 13:27
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    I think the key phrase in the quoted IRS topic is "similar services on a noncommercial basis". That is, like for like (plumber and dentist provide non-similar services), and not your business (plumber and dentist normally earn their income via those services). However, I'm not a lawyer, accountant or other tax professional. – Colin Young May 28 '21 at 14:16
  • I think this answer is wrong. Nobody was claiming the rules pertaining to being a member of a barter exchange applied (such as the requirement to collect TINs, the requirement to issue 1099B's and the requirement for backup withholding). The question was whether this is a taxable barter transaction, which is a completely different question. I don't see anything in the guidelines that suggests it isn't. (Only some barter transactions involve a barter exchange.) Pub 525 says nothing to suggest this isn't taxable. – David Schwartz May 28 '21 at 23:32
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Your accountant friend is probably right, technically. But possibly not in reality.

The IRS, being human beings, probably don't care. They would probably be annoyed if this arrangement was brought to their attention, because they might actually have to investigate it, creating more work for them and generating virtually no extra tax. And many of the people doing the investigating probably have similar arrangements which they don't want to pay taxes on. The chances of you being investigated for this are pretty much zero.

As a defence in law, which you can present to your accountant friend and the IRS if they should happen to come investigating, is to consider whether there is an actual barter agreement. In other words, do you actually agree that person A will babysit once (or some number of times), and in return person B will babysit some number of times? Are there penalities if one person doesn't fulfil their side of the agreement? If so, barter may enter into it.

If, on the other hand, you just babysit for them when they need it, and they babysit for you when you need it, and nobody keeps track of how many times each person does it, then there isn't a barter element. If there is no record tracking, and no penalties if someone doesn't meet their "agreement" (like you keep babysitting even though you haven't needed them to babysit for you for a while) then that adds weight to the lack of barter.

DJClayworth
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  • "The IRS agents wouldn't want this done to them, so they won't enforce the law" huh? – CodyBugstein May 25 '21 at 22:02
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    @CodyBugstein Rather than they "won't enforce the law", I suspect it's more a case of they "won't interpret the rules" (to include informal babysitting arrangements between friends as "bartering"). – TripeHound May 25 '21 at 22:46
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    @CodyBugstein: What's the law, though? It could easily be claimed that the babysitting has negative value: that is, I profit by spending enjoyable time with your kids. (OK, maybe not kids, but I occasionally critter-sit for friends' dogs & horses. I enjoy doing it, so it could be argued that I should be paying for the pleasure :-)) – jamesqf May 26 '21 at 03:39
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    Sooooo, "I'll show you mine if you show me yours" is taxable in USA? – Matija Nalis May 27 '21 at 16:40
  • @MatijaNalis I wouldn't assume so; is there a “fair market value” for that? – wizzwizz4 May 27 '21 at 17:28