To start a small craft business, you choose a legal structure, register the business with your state if you form an LLC or partnership, get a federal Employer Identification Number, apply for a state seller’s permit so you can collect sales tax, and plan for income tax and self-employment tax from your first $400 of net profit.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) Local business licenses and home occupation permits may also apply depending on where you work and sell. Getting these pieces in place early is cheaper than cleaning up back taxes and penalties later.
When Craft Sales Count as a Business
The IRS treats you as running a business, not a hobby, when your primary purpose is earning a profit and you pursue the activity with continuity and regularity.2Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) Selling at one craft fair likely doesn’t clear that bar. Running an Etsy shop year-round, restocking inventory, and tracking expenses does.
The distinction matters because of how expenses get treated. A business reports income and deducts expenses on Schedule C. A hobby still owes tax on every dollar of income, but your ability to deduct materials, tools, and booth fees shrinks dramatically.3Office of the Law Revision Counsel. 26 U.S. Code 183 – Activities Not Engaged in for Profit You could owe tax on your gross sales with no way to subtract what it cost you to make the goods.
The IRS also uses a practical presumption: an activity that shows a profit in three of the last five tax years is presumed to be a business.4Internal Revenue Service. Business or Hobby? Answer Has Implications for Deductions New ventures that haven’t hit that track record aren’t automatically hobbies. The agency weighs whether you keep business-like records, whether you depend on the income, and whether you’ve adjusted your approach to improve profitability. Treating the venture seriously from day one makes the question easy to answer later.
Choosing a Legal Structure
Three structures cover almost every new craft business.
Sole Proprietorship
If you start selling without filing anything, you’re already a sole proprietor. There’s no legal separation between you and the business. You own the assets, keep the profits, and are personally on the hook for every debt and liability.5LII / Legal Information Institute. Sole Proprietorship The appeal is simplicity: no formation documents, no state filing fee, no separate tax return. You report income and expenses on Schedule C attached to your personal 1040. The exposure is that if a customer sues you over a product, or you can’t pay a supplier, your personal savings and property are reachable.
Partnership
Two or more people running a craft business together form a partnership. In a general partnership, every partner shares management and unlimited personal liability for business debts, including obligations a co-partner took on without your approval.6LII / Legal Information Institute. General Partner A limited liability partnership shields each partner from the actions of the others, though availability and rules vary by state.7U.S. Small Business Administration. Choose a Business Structure
Limited Liability Company
An LLC is a separate legal entity from its owners, which protects your personal assets if the business is sued or can’t pay its debts.7U.S. Small Business Administration. Choose a Business Structure You form one by filing articles of organization with your state and paying a filing fee. There’s more paperwork and cost than a sole proprietorship, but if your products touch skin, feed children, or burn in homes, that protection matters. For tax purposes, LLC members are treated as self-employed and owe self-employment tax on their earnings, just like sole proprietors.
Registering the Business With Your State
LLCs and partnerships register with the state. Sole proprietors generally don’t file formation documents, but many states require them to register a fictitious business name (a “DBA,” for “doing business as”) if they operate under anything other than their legal name. Selling jewelry as “Pine & Thread Studio” instead of “Jane Smith” needs that registration.
Checking Name Availability
Search your state’s business registry through the Secretary of State’s website before you file. LLC names typically must include a designator such as “LLC” or “Limited Liability Company.”8U.S. Small Business Administration. Choose Your Business Name A state search only checks state records. Search the U.S. Patent and Trademark Office database separately to make sure the name doesn’t infringe a federal trademark.
Registered Agent and Filing
Every LLC needs a registered agent with a physical address in the state to receive legal documents on the business’s behalf. You can serve as your own agent, but your home address then becomes part of the public record. Registered agent services typically run $50 to $300 per year.
Articles of organization usually ask for the business name, the registered agent’s name and address, and a statement of purpose. Most states accept a general statement such as “any lawful business activity.” Filings go through the Secretary of State’s portal or by mail. Formation fees range from roughly $35 to $500, with most states falling between $50 and $200. Online filings process faster than paper, sometimes within a day or two, sometimes several weeks. Keep the stamped formation documents you get back. You’ll need them to open a bank account and apply for licenses.
Getting an EIN and a Business Bank Account
An Employer Identification Number is a nine-digit tax ID the IRS issues to businesses. Any entity other than a sole proprietorship without employees must have one.9eCFR. 26 CFR 301.6109-1 – Identifying Numbers Even sole proprietors often get one so they don’t have to put their Social Security number on every invoice and tax form.
Applying is free. The online form takes about 15 minutes, and if your principal place of business is in the United States, the IRS issues the number immediately.10Internal Revenue Service. Get an Employer Identification Number Have your entity type and the Social Security number of the responsible party ready before you start. The session times out after 15 minutes of inactivity and can’t be saved.
Once you have an EIN and formation documents, open a dedicated business bank account. Mixing personal and business funds is one of the fastest ways to lose the liability protection an LLC provides, and it turns tax preparation into a mess. Banks will ask for your EIN, articles of organization or equivalent, and ID for the account signers.
Income Tax and Self-Employment Tax
Sole proprietors and single-member LLC owners report craft income and expenses on Schedule C, which flows to your personal Form 1040.2Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) Run two unrelated craft businesses? File a separate Schedule C for each.
On top of regular income tax, you owe self-employment tax once your net earnings reach $400. The rate is 15.3%: 12.4% for Social Security plus 2.9% for Medicare.11Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business For 2026, the Social Security portion applies only to the first $184,500 of net earnings; Medicare applies to every dollar with no cap.12Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide You can deduct half of your self-employment tax as an adjustment to income.
This is where many new crafters get caught. When you worked for an employer, the employer paid half of your Social Security and Medicare taxes. Now you pay both halves. A crafter who nets $30,000 in profit owes roughly $4,590 in self-employment tax before any income tax. Set money aside from the start.
Deductible Expenses
Schedule C lets you subtract legitimate business expenses from gross income, which lowers both income tax and self-employment tax. Common deductions for craft businesses include raw materials, packaging and shipping supplies, booth fees, platform selling fees, business insurance premiums, and the cost of tools and equipment. If you use part of your home exclusively and regularly as your workspace, a home office deduction may apply.13Internal Revenue Service. Guide to Business Expense Resources
Keep receipts for everything. The burden of proof for every deduction is on you, and estimates don’t hold up in an audit.14Internal Revenue Service. Recordkeeping A dedicated folder for receipts, a spreadsheet tracking income and expenses by category, and a separate bank account are enough for most small shops. Keep records for at least three years after filing the related return, longer if you claim a loss.
Quarterly Estimated Tax Payments
Federal tax is pay-as-you-go. With no employer withholding, self-employed crafters make quarterly estimated payments. You generally need to pay them if you expect to owe $1,000 or more in combined income tax and self-employment tax at filing time.11Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business
For the 2026 tax year, the four deadlines are:
- First quarter: April 15, 2026
- Second quarter: June 15, 2026
- Third quarter: September 15, 2026
- Fourth quarter: January 15, 2027
You can skip the January payment if you file your full 2026 return and pay any balance by February 1, 2027.15Internal Revenue Service. 2026 Form 1040-ES, Estimated Tax for Individuals
Missing a deadline triggers an underpayment penalty based on the IRS’s quarterly interest rate, which compounds the longer the shortfall sits.16Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty You avoid the penalty if your total tax due is under $1,000, or if you’ve paid at least 90% of the current year’s tax or 100% of the prior year’s tax (110% if your adjusted gross income exceeded $150,000).
Sales Tax Permits and Resale Certificates
Most states tax handmade goods, so you’ll need a seller’s permit or sales tax license from your state’s department of revenue before you start selling. The permit does two things: it authorizes you to collect sales tax from customers, and it lets you buy raw materials tax-free using a resale certificate, since those materials become part of a taxable finished product.
The rate your customers pay often depends on where the sale is delivered, not where you are. Online sellers also face economic nexus rules in other states after the Supreme Court’s 2018 decision in South Dakota v. Wayfair, which lets states require collection once a seller crosses a sales threshold into the state. The most common threshold is $100,000 in annual sales, though specifics vary.
A resale certificate lets you buy supplies that go into your products — beads, fabric, wax, and so on — without paying sales tax at checkout. You then collect sales tax from the customer who buys the finished item. The certificate usually requires your seller’s permit number, business name and address, a description of the goods, and a statement that the purchase is for resale. You can’t use a resale certificate for items you’ll keep for personal use; misuse carries penalties plus the unpaid tax.
Local Business Licenses and Home-Based Rules
Cities and counties often require a general business license to operate within their boundaries, even if you’ve already registered with the state. Fees vary. Some charge a flat annual amount, others base it on projected revenue.
If you work from home, check whether your local zoning code requires a home occupation permit. These permits exist to keep commercial activity compatible with residential neighborhoods and often restrict non-resident employees, signage, customer visits, and delivery traffic. Operating without one risks fines or a shutdown order. Your city or county planning department can tell you what applies.
Extra Rules for Children’s Products
If any of your crafts are intended for children under 12, federal product safety law applies. The Consumer Product Safety Improvement Act requires every children’s product to carry a tracking label with the manufacturer’s name, production location and date, and batch or run information.17Consumer Product Safety Commission. Tracking Label Business Guidance The information can be coded as long as consumers can contact you to decode it.
Children’s products must also meet federal safety rules on lead, phthalates, and other hazards, and manufacturers are normally required to have products tested by an accredited third-party lab. That testing costs hundreds of dollars per product. The CPSC offers relief through its Small Batch Manufacturer registry: if your prior-year gross revenue from consumer products was $1,480,296 or less and you made no more than 7,500 units of a given product, you can register for an exemption from third-party testing.18United States Consumer Product Safety Commission. Small Batch Manufacturers – SaferProducts Registration is free and renews annually. The exemption covers testing only; the underlying safety standards and tracking labels still apply. If you make only adult items, these rules don’t reach your products.
Staying in Good Standing
Registration isn’t a one-time task. Most states require LLCs to file an annual or biennial report confirming contact information, registered agent, and management details. Missing the deadline can trigger administrative dissolution, which revokes your business’s legal existence. Reinstatement is possible but costs more and takes extra paperwork. Report fees range from nothing in some states to several hundred dollars in others.
The Corporate Transparency Act originally required most small LLCs and corporations to report their beneficial owners to the Financial Crimes Enforcement Network. A March 2025 interim final rule exempted all domestic companies from that requirement while the government finalizes revised rules.19Federal Register. Beneficial Ownership Information Reporting Requirement Revision and Deadline Extension A domestic LLC formed today doesn’t need to file a beneficial ownership report. Watch for FinCEN updates in case the rule changes.
No law forces most craft businesses to carry insurance, but going without is a gamble. General liability covers claims if a customer is injured at your booth or in your studio. Product liability — sometimes included in a general policy, sometimes separate — protects you if something you made causes harm after the sale. Candle makers, soap makers, and anyone producing items that contact skin or get ingested should treat product liability coverage as a baseline cost. Policies for small craft businesses often start at a few hundred dollars per year.
Finally, keep records. The IRS doesn’t mandate a specific system, but whatever you use must clearly show income and expenses.14Internal Revenue Service. Recordkeeping At minimum: every sale, every expense receipt, bank and credit card statements, mileage logs for business travel, and copies of filed returns. Good records also tell you whether the business is actually making money.