Those who have started a microgym and grown in from scratch are probably familiar with this business model/idea: Trading services for membership. Have you ever ”hired” a coach by paying him/her in a free membership? That’s a most common trade. But, we’ve seen others. You trade a website for a free three months at the your gym. You put a member in charge of your social media posting and in exchange he/she gets a free membership. It’s a fantastic idea to get help without increasing your costs. And, it’s pretty innocent, right?
Maybe Not What You Think
Technically speaking, it isn’t as innocent as you might think and you could get in trouble for it. What kind of trouble? Well, let’s looks at this situation.
When you trade services for memberships, you are in essence paying someone for their service. No, you aren’t actually giving them money. But, you are providing them value. And, unfortunately, that value is taxable. Enter the IRS. If you are providing someone value in exchange for a service, someone has to pay taxes on that value. If your monthly membership is $150, and you are giving your trainer a free membership in exchange for a few hours coaching each month, you are paying that trainer $150.00.
Bring In The IRS
This really becomes an issue once the value provided exceeds $600.00. That’s when the IRS says you have to start paying taxes. So, what ”should” you do? Each month, somewhere in your accounting, you should show that value of the membership being provided to the trainer. It is technically a staff expense. Then, at the end of the year, assuming the value has exceeded $600.00, you need to issue the trainer a form 1099 (if you can qualify them as an independent contractor vs an employee). If the IRS audits your business, and finds this trading, and you’ve never declared it in your taxes, you could be looking at fines and other costs from the Federal Government. Now, this idea of trading services for membership may not look so sweet.
Is This Really a Big Deal?
Practically, however, how likely is it that your trading will become a problem? That’s for you to decide. Like we indicated above, this kind of thing happens all of the time. If you are going to do this, and we cannot advise you to do it, we suggest you do it for a limited time. Once you are making enough to actually pay someone, bring on a trainer you are paying for. Pay him/her money, pay taxes, stay legal, and keep everyone happy.
