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Honored Advisor
krumy205747
Posts: 2,529
Registered: ‎10-28-2009
0

Making money in the shop....discuss

This is for anyone who generates some little or some lot of income in their shop. I recently put an add in the local paper and am doing some furniture repair, not refinishing. I have been surprised at the early response and while I won't get wealthy it does help pay my shop expenese.

 

I talked to an accountant and he advised me to keep track of every little expense,  buy supplies/material/tools only with a credit card, but not a debit card.  A credit card is for ease tracking those expenses. Deposit every penny I earn in a special account for the same reason, including cash payments. He says, "cash can be traced" so be honest. He also told me at this point, any shoptime is "for profit". If it's not, any income from a hobby is 100% taxable at about a 30% rate with no deductions. I am following his advice but one expense I didn't count on was insurance.

 

Since I'm doing work for others the first thing I did was buy liability insurance to cover myself in case someone gets hurt by something I repaired or manufactured. Yesterday, I added contents and structure insurance to that policy. The reason? Since I'm generating income, no matter how little, my homeowners policy doesn't really cover my shop and tools anymore, I could get a rider for $5,000.00 on the contents but replacing all of my tools would cost much more than that. So, how about it? Do most of you who generate income have seperate policies for such things? Do you still consider yourselves hobbyists?

 

Steve K

Where do I get my wood? I'm oppor"turn"istic!!
Honored Advisor
RussBoyd
Posts: 8,066
Registered: ‎10-23-2009
0

Re: Making money in the shop....discuss

[ Edited ]

I generate a fair amount of "income" from my shop. I called my homeowners insurance company to make sure my shop and contents were covered. They said yes. I know of no other insurance required (for the shop), or why it would be. I DO know that, technically, you should have a business license. I've never heard of this "profit vs. income" thing. It seems to me that income is income. When you are self employed, profit IS income. Now, if you have another job then you may get away with it. I would consider the insurance you just got. You said...."I'm generating income", but yet your accountant said....call it "for profit, not income". Be careful that the insurance thing doesn't raise a red flag, is all I'm suggesting. As far as how I look at my shop and the work that comes out of it.....I built the shop for hobby stuff but still kick out some things that are for business. I did NOT write off the building of the shop (that's my story, and I'm sticking to it), but the occasional tool DOES get written off IF I bought it to use for business. I lean WAY toward not claiming a LOT of things others might, just to keep it simple and if I'm ever audited, they will owe ME, not the other way around. :smileyvery-happy: (I hope)    Best of luck with your endeavor.  PS..I do have business insurance ( licensed and bonded too), so maybe that's part of the difference.

"If you can't hide it...advertise it!"
Honored Advisor
-Paladin-
Posts: 1,521
Registered: ‎10-31-2009

Re: Making money in the shop....discuss

In general terms "Profit is what is left of the income stream after all expenses including wages are paid.

 

The "Profit can remain in the "Company" to be invested in all the normal ways or reinvested in the business as realestate/buildings/machinery or, paid out as dividend to owners and shareholders.

 

In most cases major tools/machiens can not be written off as an expence in a year, you will need to write off a depreciated value on a yearly basis.

 

For most home WW's who wish to also do WW as a side business it is often best to just pay a flat rental price for the use of the shop and equipment. When I was still doing "for Profit" work for others this is what I did. Every hour I spent working for a customer I paid $22.00 for the shop. This covered everything in the shop from lights and phone to glue. Then I paid for specific project materials and misc expences that were not part of the shop rent. Paid my self the rest of it as my wage/commision.

 

Likely the best thing anyone considering WWing for profit can do is talk with a good "Small Business" accountant. I stress the aspect of Small Business as these are the guys who realy understand what it takes to run a small business and have some money in your pocket at the end of the year. Expect to pay$, good advice like good WWing does not come for free.

~PALADIN~
Wood'nBoats&Stuff
Esteemed Advisor
hankm
Posts: 2,103
Registered: ‎11-07-2010
0

Re: Making money in the shop....discuss

Paladin gives very sound advice, and I also would add that the Small Business Association:

http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business

Is available to give free guidance and advice to start- ups and sole proprieters for the most part. I have to issue one caveat however, all field offices are not playing on a level field. I had the bad luck to meet with a local in my area who made it clear his mandate was to help promote women, especially women of color; this appeared to be a mandate from above, so they do run a "flavor of the week" type of program being a gov't agency, but if you can wait that out it's a resource your tax dollars pay for and you are entitled to it.

Don't ask advice on federal firearms law from people on the internet unless you like jail food.




- Beachside Hank, WOOD Online Video Host

Senior Contributor
Gary Hanscom
Posts: 529
Registered: ‎10-23-2009
0

Re: Making money in the shop....discuss

Russ posted:

"I called my homeowners insurance company to make sure my shop and contents were covered. They said yes. I know of no other insurance required (for the shop), or why it would be."

 

I would be VERY careful on this...older homeowner policies were quite ambiguous on the definition of "business". The newer forms clearly expand on that definition to the detriment of "in-home" businesses, tools, etc. Read your homeowner policy form carefully. If you don't have one (usually 18+/- pageslong) ask your agent for one. There are defined limits on property used in ANY manner for ANY business purpose....like $2,500 max! Read those limits (listed under Section I Property Coverages, Specilal Limits of Liability) and read the definition of business.

Russ, did you talk to your agent or to an actual insurance company claims employee? And will they give you that information (and "promise") in writing?

Gary

 

Community Manager
MSWOODcraft
Posts: 5,408
Registered: ‎10-23-2009
0

Re: Making money in the shop....discuss

I've got a couple of thoughts.

 

First up, every individual state has different insurance laws, and what flies in, say, Pennsylvania may not fly at all in Florida. I wrote personal lines insurance policies for a number of years in the late '80's to mid-90'.  Only a sit-down conversation between you and your personal lines agent can clear up what is and what specifically is not covered.  If you're doing it and your personal lines agent says it's not covered you get to get a commercial lines policy to cover the exposure.

 

I've got a 2mil commercial package policy that covers my work, a limited amount of tooling, some cash for the building, etc.   I'm in Illinois and any work related activities in the home done on the scale that I'm doing them are specifically not covered under my homeowner's policy.  So I needed a separate policy to cover me and my activitites.

 

 

Best,

Matt Seiler
Wood Online Moderator

Senior Contributor
trimjim
Posts: 356
Registered: ‎10-24-2009
0

Re: Making money in the shop....discuss

Technically by the IRS, if you have a full time job then you can't have a business, it's a hobby.  Also by Palladin's method of $22/hr for shop time is okay if that's how you're charging but not by "writing off" or else as "owner" of the shop you need to claim the income of $22/hr then subtract the actual expenses to have a net income as a landlord.  I'm not sure why someone wouldn't subtract expenses from a hobby to get a net profit and I don't see how you'd be in a 30% taxes unless that's your actual tax bracket.

Honored Advisor
krumy205747
Posts: 2,529
Registered: ‎10-28-2009
0

Re: Making money in the shop....discuss


trimjim wrote:

Technically by the IRS, if you have a full time job then you can't have a business, it's a hobby.  Also by Palladin's method of $22/hr for shop time is okay if that's how you're charging but not by "writing off" or else as "owner" of the shop you need to claim the income of $22/hr then subtract the actual expenses to have a net income as a landlord.  I'm not sure why someone wouldn't subtract expenses from a hobby to get a net profit and I don't see how you'd be in a 30% taxes unless that's your actual tax bracket.


I hope to get a lot more discussion from this topic, both for me and for anyone who might get an unpleasant surprise someday.

 

The 30% comes from what my accountant called a "self employment tax" and soc. sec. tax. If you're in business for yourself you pay both halves of the soc. sec. tax, computed on your net income.  He says it works out to basically 30% of your net.

I told him mostly I just wanted to support my hobby as I'm involuntarily eary retired and just wanted some spending money. That's when he replied "A hobby that makes money", "now it does get ugly". He told me as far as the government is concerned a money making hobby is taxed at the same rate except there is no oppurtunity for deductions. In other words, your gross income is also your net income and you are taxed on the gross. His words, not mine.

 

I did also consult with my homeowners insurance agent and he did advise me to get additional coverage which he could not provide.

 

Steve K

Where do I get my wood? I'm oppor"turn"istic!!
Senior Contributor
woodchuck29
Posts: 106
Registered: ‎12-10-2009
0

Re: Making money in the shop....discuss

[ Edited ]

Until the general public quits haveing the mentality of thinking that most woodworkers are retired and do woodworking as a hobby, it will never become profitable enough. Been there, done that, don't ever care to try it again. Even the wood working forums think that you should work for free giveing out advise and ideas while they profit from it. In other words, your better off working at WalMart or McDonalds.

Senior Contributor
trimjim
Posts: 356
Registered: ‎10-24-2009
0

Re: Making money in the shop....discuss

You're right about both halves of SS and Med however there will be a deduction for 1/2 on the 1040.  If you're not planning on going back to work then this would be a full time job even if you only work a few hours/wk.  It has to do with where your majority hours of employment are... You can retire and still have a job/business

 

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