When should I start a bookkeeping system for my handmade or creative business is a question that is asked a lot.
Let’s start with WHY its hard to get a straight answer to this question:
- There’s a lot of conflicting information out there on the internet.
- Some of this information is outdated and you won’t know, because the blog post has no date!
- In Facebook groups you’ll find well meaning people who are offering bad advice that is based ONLY on what they were told, read somewhere, or on just what they think they understood.
- If you’ve ever watched any of those “how to start a handmade business” free videos or live sessions, those coaches are talking about finding your why, defining your core values, and deciding what products to sell.
- Maybe someone suggested that what you have is a “hobby business”, like it was some sort of magical type of business – somewhere between a hobby and a business – that you don’t need to worry about bookkeeping or record keeping…..for now.
Before we go any further..
I just want to say that there is no such thing as a hobby business! I’ve heard this term used a lot when starting a handmade business in certain Facebook groups.
Next, taxes are confusing!
Because there are so many different ones that you could (and probably will) be dealing with. Here are some examples:
- Federal Income Tax
- State Income Tax
- Local Taxes (City or County)
- Sales Tax
- Property Tax
- Franchise Tax
- Self-employment tax
- Use tax
And, they ALL have their own VERY DIFFERENT rules and requirements.
Maybe you read or heard that:
- if you sell on Etsy, Ravelry or some other marketplace that you’re considered a “hobby” and don’t need to report your sales
- or, maybe you heard that you don’t need to report your sales until you make $400 (or some other amount)
I hate to burst your bubble, but all of these things are nothing but total BS!
It doesn’t matter if you:
- didn’t make a profit
- only had $100 in sales
- haven’t registered as a business
The reality is, as soon as you make that first sale, you:
- are a business in the eyes of the IRS. Because the reality is that most of us sell the things we make with the desire, intent, or goal of making money
- have tax responsibilities to any of the tax agencies mention above
- and, you need to have some sort of bookkeeping system in place
Read this blog post – Are you a hobby or a business in the eyes of the IRS – for more information.
When you read (or someone tells you) that you don’t need to report your sales until you make $400.
That magic $400 they are talking about is self-employment taxes – which is a totally different animal.
It’s worth stopping here to say that self-employment tax is similar to the FICA or Social Security and Medicare taxes that would be withheld from your paycheck, if you worked for someone else as an employee.
BUT, there is a big difference!
When you work for yourself, even if you are a sole proprietor and don’t take a paycheck, you are required to pay self-employment tax when your business has a Net Income of $400.00 or more. This self-employment tax is in addition to any Federal, State, or Local Taxes that you might owe at the end of the year.
Currently you’re required to pay a total of 15.3% of your Net Income in self-employment taxes. This is split out to 12.4% for Social Security and 2.9% for Medicare.
Is your head reeling yet? I know mine is and to be honest – my blood pressure is up a bit too. Mainly because no matter how well meaning those people are that wrote the blog post or provided this information – they aren’t doing you any favors! And if you listen to them, well you might find yourself in some tax trouble at the end of the year.
So, here’s my advice about WHEN you should start a bookkeeping system for your handmade or creative business….
Start a bookkeeping system as soon as you start thinking about turning your hobby into a handmade business.
In reality, if you considered what you’re doing a hobby initially, you should have started then. But that’s water under the bridge, as the saying goes.
Really, as soon as you start thinking about turning your hobby into a business there are certain things that you need to start keeping track of in some sort of a bookkeeping – or even a really simple recording keeping system.
If you stop and think about it, most of us are even spending money out of our own pocket (or the family budget) at this point anyway. Right?
That money that you take out of your own pocket is considered an Owner Investment (or Contribution), which becomes part of your Equity in the business. It’s also considered to be part of your Start Up Costs.
Don’t get into that really bad habit of saying, oh well I’ll just pay for this out of my pocket or personal account and then totally forget about it.
If you’re going to have a handmade business.
Act like a business right from the very start. Because you are going to have to answer to the tax man and the IRS doesn’t fool around when it comes time to file your tax return.
I know a lot of the handmade business coaches make it sound like it’s easy to start and create a profitable handmade business.
The reality is that it takes a lot of time, patience, and energy to build the business of your dreams. It’s a process. And honestly, you won’t see a 6 figure income for a long time, maybe never.
If you’ve decided that your in this for the long haul, the sooner you start a good bookkeeping system and procedures the better off you’ll be in the long run. And you’ll be in great shape when the money does start rolling in.
I know it’s easy to get caught up in the advice from these coaches and turn your focus to the more fun stuff of starting a handmade business, like:
- discovering your WHY
- finding your ideal customer
- choosing the perfect business name
- creating a product line
- nailing down your pricing
- developing your brand
- crafting an elevator pitch
- and, all that other more fun stuff
At this point, you want to also start keeping track of how much money you are putting into your business before it even starts.
Without a solid understanding of your financial numbers you just don’t stand a real chance and those numbers include how much money you invest in your business before it starts to earn any money.
I took a couple of these courses myself when I started my own handmade business several years ago. Both courses left out the whole bookkeeping discussion.
Developing a good bookkeeping system and processes take time…
You didn’t learn to knit, crochet, or design patterns overnight – it took time to develop the skills and the processes.
Bookkeeping is no different when it comes down to developing the system and creating the processes. And you will need to spend some time learning how to do your bookkeeping properly.
You’ll be spending money on courses or memberships while you’re going through this thinking or research phase of starting a handmade or creative business.
A simple spreadsheet at this point will work well to keep track of what you’re spending:
- who you paid the money to
- what it was for
- when you spent the money
- how much you spend
- and, even why you spent it
Bookkeeping is one of the most important pieces of starting and running a successful handmade business.
Make sure you get the money sorted out, by creating a budget.
- figure out how much money you need to run your business….for the entire first year
- you can’t just ignore the money your business needs
- and you can’t just assume that somehow you’ll have enough money
- because you can’t just ignore business or personal bills
Don’t underestimate or ignore your administrative tasks.
So, when should you start a bookkeeping system for your handmade business…..right from the beginning!