Selling your work - pro or hobbyist?

[Jfitz]

There is another thread about taking the plunge that morphed into a 'legal business or not' discussion, so I thought it warranted its own thread. Moderators - feel free to jump in, change, or shut this down if I've overstepped my bounds.

There is "taking the plunge" in terms of the work itself, but then there is the business aspect of it - the form and methods of selling the work, and what needs to be done to do it properly.

I think what it comes down to is conforming to the law or not. I know of, or witness, many 'professionals' who also break the law as far as the work they do (code violations) or how they handle the business (side jobs, 'cash' jobs, improper management of expenses or personal use, etc), so lets not get hung up on finger pointing. It's not a question of one being a pro or hobbyist, it's a question of whether the selling of your work is done properly. I think this was the main point that was raised. Obviously, there are a lot of costs incurred to properly run a business.

For the hobbyist who lets it be known (i.e. advertises) that he can be hired and then sells an item to a friend or neighbor - be it a commission piece or not - I would say the letter of the law says yes, that's selling and without the proper business structure it is illegal. But if I make something - say, a nice vase or an end table - but then a neighbor asks to buy it from me, or I just list it on CL, is that a private transaction? or is that a business transaction? I would be surprised if there have not been rulings in this area, I just don't know of any. I do not know how Craigslist transactions are treated as far as sales tax, but some articles I have found online indicate that legally a buyer is responsible for any 'use tax' when sales tax is not collected at the time of sale.

There is also then the entire 'compliance' issue with selling the output of your hobby. As was pointed out, a "real" business has costs related to liability insurance, inspection fees, hazmat compliance, retail licenses, etc etc etc. I can't even get my head around how any of that would apply to someone working out of a garage. I have no doubt that every state is different - for instance, here in MA, anyone that uses less than 27 gallons/month of a hazardous material (e.g. paint thinner) is considered a 'very low generator' and the handling/reporting requirements are streamlined, but this is probably different in other states. Maybe someone more knowledable can jump in.

This is certainly a big issue for anyone looking to take the plunge and go into some type of woodworking as a full time job. I'm curious what people have found out.

[CessnaPilotBarry]

Lots of questions in your post. My opinions:

Intent:

- If you make something for yourself, and as it sits on the table, your neighbor offers to buy it, or you redecorate and it no longer "goes"... I don't see that any differently than selling any other personal property. Craigslist, eBay, yard sale, whatever... Just like selling my used car or TV.

- If the intention from the get-go is to sell the item to a stranger, I think you have the duty to follow your local laws, including collecting required sales taxes.

Making something as a favor for a friend or relative, which may return a gift card, fine wine, weekend in the recipient's vacation home or day on the boat... on a one-off or irregular basis is also fine in my book, as well as my understanding of the law. It's all about the volume and the relationship of the parties involved.

The IRS plainly states that ALL income is reportable, including barter. I really doubt they'll bust down your door over the restaurant gift card or 12 year old Scotch you got for some bookshelves. Most legal definitions I've seen include references to "arms length" transactions, and "holding oneself out".

Compliance:

--- Related to woodworking ONLY. Obviously, "skilled" trades, like plumbers, electricians, glaziers, people who's mistakes can cause big damage and/or death, have their own licensing requirements.---

I'm sure this varies hugely by locale. I make no claim that any of this is true elsewhere. In my area, one, and a couple, person small businesses are exempt from most of the above subjects except sales taxes and zoning regulations. For example, if I have a steady flow of foot customers or truck deliveries (freight truck, not FedEx, UPS, DHL, etc...) to my home without a variance, and a neighbor complains, my local government zoning board will quickly fine me. If I'm making things to take elsewhere and/or bringing my own materials in, I am fully within the rules. I need a sales tax permit and a holding account to collect and forward sales taxes on items I make and sell.

Liability insurance all comes down to what I am protecting. There is no requirement for me to have it, but anyone can sue anyone, for any reason. If you have assets to lose, you need it. If your product or service has a low likelyhood of getting you sued, and/or the policy is added to existing business, the insurance might be surprisingly cheap. Insurance companies LOVE predictability.

The only inspections of small non-storefront businesses in my area would be by an insurance carrier, not the government. Businesses that are open to retail or food service foot traffic are subject to occasional fire safety inspections. These guys are looking for exit signs, extinguishers, escape routes, audible alarms, no dead-ended aisles, etc... They intend to protect the public, so don't inspect small woodshops.

If you're working from home, your homeowner's insurance needs to know. Business equipment is usually not covered by standard homeowner's policies, and operating a business from your home may void your homeowner's insurance. This alone can make an outbuilding or rented industrial condo worthwhile.

We do not need a license to make custom or small-scale manufactured items. We do need an inexpensive tracking number to do any installation or improvement to residential property over a set value. I can't remember if it's $300 or $400.

[dwacker]

If you want to off your unused items I dont think any one cares, there is a time when you cross the line from hobby to retail. For me I dont really see selling a object to your neighbor for money as retail. I really doubt the state or feds care either. I think its pretty much common sense and when you know your doing it to make a profit and your holding yourself out as a pro you know you should comply with the laws.

Now once you decide your a business your entity status and # of employees determines what rules you have to follow. How you pay yourself also changes the game. This is federal law and it doesnt matter if its your home or a store front your subject to the inspection. The state will have their own set of rules based on business entity type, this can even go down to the city level. The rules are so abundant I dont think you could fit them in a general discussion.

Don

[HoboMonk]

Note: The IRS treats hobbies (1040 "Other income" and Schedule A for expenses) differently than businesses (Schedule C).

A hobby can make a profit or break-even, but cannot declare a loss.

A business can make a profit or declare a loss that can be applied to other income.

In both cases income (profit) is taxable.

Blessings.

[williaty]

In 2011, I made the jump from hobby to pro, although not in woodworking. After reading dwacker's hostile replies in the other thread, I though I'd find this thread and put in a contasting viewpoint.

I found the legal aspects of starting my own business to be a lot of busy work, but not actually hard or daunting (as opposed to the accounting aspects which have been driving me up the wall). It was actually extremely simple. Formed an LLC with the state and elected to use pass-through taxation. Notified the Fed to get an EIN. Took that FEIN and notified the state and county that I'd like to collect sales tax for them. Opened for business. I submit sales tax to the state (who handles passing some to the county for me) twice a year via their website. They even give me some back for paying on time. I file an infomational-only return with the Fed in April and then my own 1040 with Schedule C. That's it. I don't have to have any other regulatory oversight than that. Well, fire marshal stops by once a year if they have the budget to do it that year, they often don't. Since I have no employees, I don't have any of the things like worker safety insurance, regulations, etc. No unemployment, no disability, etc. I'm not required to certify new machinery (and what I do uses equipment as dangerous as woodworking that makes a much bigger splatter when it fails), I don't have periodic inspections of my air compressor.

So the take-away message is that the government's influence on your business startup can range from minimal to Orwelian depending on the state, county, and city in which you live. Consulting with either a lawyer or a small-business advocate should ABSOLUTELY be something you do before you take the plung to figure out what issues you'll be dealing with in your location. For my other thoughts on making the transition, I'll add them to the other thread.