Taxes, bookkeeping and insurance

Do these four things on day one

1. Open a separate bank account for the business, and run every sale and every expense through it. This one habit does most of the bookkeeping for you, and mixing business and personal money is the thing accountants most wish hobby sellers would stop doing.
2. Record as you go. A spreadsheet is enough to start: date, what, who, amount, category. Bookkeeping software earns its fee once the volume grows or once you sell on more than one platform.
3. Keep every receipt, photographed on the day. A shoebox in April is not a system.
4. Set money aside from every payment. Tax on self employment income is not withheld for you. The share depends on your situation, which is a question for your accountant, and the habit matters more than the exact figure.

It is income

What you earn selling your work is taxable income from the first dollar. Marketplaces and payment processors report seller income to the tax authority above thresholds that have changed several times in recent years, and the absence of a form does not mean the income is not taxable. In the United States, net self employment income also carries self employment tax on top of income tax, and once the amounts are meaningful you are generally expected to pay estimated tax through the year rather than all at once.

Hobby or business

The United States tax authority distinguishes a business, which is run with the intent to make a profit, from a hobby. The distinction matters because a business can deduct its expenses against its income and, under current rules, a hobby largely cannot, while the hobby's income is still taxable. Running it like a business is the evidence that it is one: separate account, records, pricing worked out from cost, and an effort to make money. If you are buying a machine partly on the strength of selling work, talk to an accountant about this before you buy rather than after.

What is commonly deductible for a business

• Wood, sheet goods, finishes, hardware and packaging.
• Bits, collets, spoilboards, sandpaper and other consumables.
• Software subscriptions and purchased design files.
• Marketplace fees, payment processing fees, advertising and shipping.
• Booth fees, and mileage for business trips such as the lumber yard and the post office, if you keep a log.
• Machines and larger equipment, which are often deducted over several years or under special rules. Ask how before a large purchase, because timing can matter.
• Part of your home, if a space is used regularly and exclusively for the business. The rules are specific, so ask.
• Insurance, professional fees and education directly related to the business.

The test in every case is that the expense was for the business and you can show it. Records are what turn a cost into a deduction.

Sales tax

• On marketplaces, United States states with a sales tax generally require the marketplace itself to collect and remit it on your sales through that platform. You will see it in your reports and not in your bank account.
• Everywhere else, it is your job: your own website, craft fairs, local customers and direct orders. That normally means registering with your state, collecting at the right rate and filing returns, even for small amounts.
• A resale certificate from that registration often lets you buy materials that go into products without paying sales tax on them.
• Digital files are taxed in some states and not in others. If files are a meaningful part of what you sell outside a marketplace, ask.
• Selling into other states from your own site can create obligations there once sales pass a threshold. For most hobby sellers this is a long way off, and worth knowing it exists.

People you pay

If you pay someone for services to the business, such as a designer, a finisher or a photographer, you may have a reporting obligation once the amount in a year passes a threshold. Collect their tax details before you pay them rather than chasing them in January.

The insurance gap

This is the one most hobby sellers do not know about until it matters.

• A homeowner's or renter's policy commonly excludes business activity. That can mean business equipment is not covered, and it can mean a claim connected to the business, including a shop fire, is contested. Tell your insurer what you are doing and ask what is and is not covered. The answer is sometimes an inexpensive endorsement.
• General and product liability covers a claim that something you made hurt someone or damaged something: a sign that fell, a shelf that failed. Many craft fairs and wholesale customers ask for proof of it, and small craft business policies exist for exactly this.
• Equipment cover for the machine and tooling, which may need to be listed specifically.
• Customer property. If you carve customers' own pieces, ask whether property in your care is covered.

Dust collection, a fire extinguisher within reach and never leaving a running machine unattended are the cheapest insurance in the shop. See safety.

When to pay for help

An accountant in your first year of selling, before a large equipment purchase, when you form a company, when you start paying other people, and when sales outside marketplaces become regular. It is a deductible expense and it is nearly always cheaper than the alternative.