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Starting a Jewelry Business: When a hobby becomes a business

10 topics to help jewelry makers prepare for tax time when their hobby becomes a business.

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As vendors, we charge, and pay taxes — but do we always have to? When does your hobby become a business? Taxes can be tricky, and vary by state, make sure you get it right by consulting an accountant.

 

Most tax questions and answers will come down to whether you are operating as a business or hobby.  You’ll want to get it right if you don’t want the taxman to come down on you. The best way to clear up the confusion is to talk to an expert. My accountant, Jori M. Culp, of Smoker, Smith and Associates PC in Hershey, Pennsylvania, helped answer some of the top questions I hear in our creative community.

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1

Do I need a sales license?

The laws vary by state, so check your state’s website for specifics. Look into two licenses to obtain: a license to be exempt from paying sales tax on your purchases, and a license to charge sales tax for items you resell.  These both differ from the wholesale license, which is for those who buy items in bulk from manufacturers and sell them to retailers. (Note: If you also sell items retail, you are not a wholesaler.) 

 

In addition, if you sell jewelry or kits at a show or fair outside of your state of residence, contact that state about its temporary sales licenses, for which you may have to pay a fee. Some states issue a Special Event Collection Report (which you can use to submit paperwork and payment after the event) or send a tax collector directly to the venue to collect the taxes in person at the end of the event. Don’t be alarmed; they will walk you through it — but do be sure to ask for their credentials. 

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2

When do I need to prove I have a license?

States may also send an official to craft shows to do random license checks. Play by the rules. Your license to charge sales tax should be handy at your booth. You also need to provide your suppliers with your tax exemption number so you don’t pay sales tax on applicable purchases.

 

3

When am I exempt from paying sales tax on things I buy for my business?

Only if they are used in items you resell. Then you must charge sales tax when you sell the finished goods using those items. You are exempt from paying sales tax on beads, wire, findings, and so forth, but not your tools, studio storage, or promotional material. Although you can’t claim a sales tax exemption on all purchases for your business, you can itemize deductions on other business supplies that won’t be transferred as goods to a buyer.

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4

What about sales taxes and kits?

You don’t pay sales tax for supplies that go into kits to be resold. You do charge sales tax for your kits. Make sure to know what the tax rate is for each state in which you sell.

 

5

Do I charge sales tax for online sales?

Again, this may vary from state to state.  As of November 2015, you only owe sales tax for sales delivered in your home state. Otherwise report only your income from online sales. Digital deliveries are not taxed in my home state of Pennsylvania; we don’t charge sales tax for a PDF download someone orders and prints themselves. But if the delivery address for a physical product ordered online is in your home state, you do charge sales tax. So far there is no other sales tax online, but these rules are under scrutiny. Stay informed!

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6

Hobby or job?

Even if you have another unrelated job, you can claim expenses against your jewelry business, but the burden is on you (the taxpayer) to prove intent to make a profit, time and effort, dependence on that income, future expectations, experience, and knowledge in your area. These factors are used by the IRS to label an activity as a business or a hobby and will affect deductions. 

 

7

What about home deductions?

If you act as a sole proprietor or single-member LLC you must have a “regular and exclusive” dedicated space in which you conduct business to deduct home expenses such as mortgage, real estate taxes, utilities, etc. A simplified method for home office deductions uses the square footage of your studio space, so calculate that to share with your accountant. Sorry, but the dining room table doesn’t count. Your space must be exclusive. 

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8

Should I incorporate or become an LLC?

There are definite tax advantages that might be helpful to you as an LLC (Limited Liability Corporation), C corporation, or S corporation. Whether one of the latter two is right for you depends on the size of your business and its profitability. Either one of them requires legal consultation, which may be costly. For a small business, an LLC is related to liability and would protect personal assets from a lawsuit. Ask your accountant if incorporating would be beneficial to your specific situation. 

 

9

What tax records should I keep?

We pay taxes according to income and expenses, determined by tracking cost of goods and inventory. Even a box of receipts to tally up at tax time is better than nothing. (But keep a spreadsheet or use tax software.) Daunting, yes, but start by tracking new purchases and gradually add in existing inventory. The equation is simple: starting on any chosen Day 1, track purchased quantities. On the end date (when taxes are figured out) track what’s left. This gives the value of what has been used (removed) from inventory. 

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10

How do I get started?

If you have an accountant already, make sure they are knowledgeable about your specific needs. If you need one, ask close friends in similar small-business situations who they use. Many cities have services that provide free or low-cost accounting and legal aid to artists — check with your local branch of Volunteer Lawyers and Accountants for the Arts. Find an accountant, as they will have the best answers to help guide you through the tax confusion. And remember, accountants’ fees are deductible! 

 

Watch for the next blog on “5 Favorite online markets.”

 

 

Have a question or comment? Please contact us at editor@FacetJewelry.com.

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