Definition: Payment-in-kind (PIK) is a form of non-cash compensation paid with a product, service, or equity.
What Does Payment-In-Kind Mean?
What is the definition of payment in kind? An in-kind transaction occurs when a person or entity receives compensation in the form of a non cash payment. Simply speaking, it’s a lot like bartering. The payment-in-kind concept applies to a number of financial scenarios, such as in-kind notes or securities, and in-kind wages that are sometimes prevalent in small service businesses.
An in-kind payment method helps to alleviate cash output, and typically results in more value and risk to the compensated party. In the case of securities, the security typically pays a higher rate of PIK interest or dividends. This interest or dividend payment is typically paid in the form of additional equity (shares), and therefore is considered a PIK.
This is also the concept behind stock options.
Let’s take a look at a simple example of an in-kind transaction
Example
Let’s assume you’re an electrician, and you operate your own small business. You conduct business in a small town, and there are a lot of small businesses within the area. One day, you receive a call from the local barber, who needs a few more electrical outlets installed in his shop. Prior to starting the work, you provide the barber a quote, and he informs you that he will not be able to pay for the work with cash, rather, he’d be willing to offer you free hair cuts for 1 whole year.
Assuming the value of hair cuts is adequate to cover the cost you would invoice the barber, it’s reasonable to accept the payment-in-kind. At the end of a tax year, the Internal Revenue Service would require your small business to report the PIK as taxable income. Therefore, you would have to accurately account for the value of the payment-in-kind (number of trims multiplied by the value per hair cut).
Summary Definition
Define Payment In-Kind: PIK means compensation in the form of a product, service, or equity.
