Paracord Business

If you decide to move beyond merely hobby-level creation and start selling your crafts, you'll be entering an arena filled with a great deal of confusing information. This confusion is compounded by the fact that every state is different, and there is no shortage of self-proclaimed experts who will lead you astray. Before we get into any detail, we need to put forward a caveat - if you are unsure about your obligations, talk to an actual paid expert in your local area. An accountant or lawyer who works with small businesses will be able to give you real detailed information for your particular situation. This page will try to give you some guidance, but only in general terms for state-level issues. Federal issues are simpler, so we'll look at them. Now, with that out of the way, let's look at some of the general rules about becoming a small business.

Small Business Basics

At a very basic level, if you're selling anything, most states require that you collect and file sales taxes with the state. This will usually require that you get a sales tax form, and may also require other reporting or licensing obligations, depending on the state. In many states, there is no business license for small businesses that just produce crafts for retail sale, but you really need to check your own local laws.

If you live in the USA and make a profit, the IRS requires you to report that as income and pay taxes on it. Those taxes will be higher than you might assume, because as a self-employed person, you don't have a company paying part of the Social Security taxes, which means it's your responsibility.

In order to fulfill these requirements, you will need to keep records of your sales and expenses. Do not create something fictional, but don't short-change yourself either. Remember to consider postage, craft show fees, and all your supply expenses as debits. Assuming that you're making all your own material, you'll be considered a sole proprietor. This is the simplest small business to address, as you don't need to create a new federal tax ID. The benefit is simplicity; the downside is that all business liabilities are your personal liabilities.

Federal Reporting Requirements

If you are the only one working in your business, you will probably be defined as a sole proprietor. A sole proprietor is treated as a self-employed person using his or her own Social Security Number as the business tax ID, and if you have to file taxes normally with the IRS (which most of us do), you'll need to include your business income on your forms at the end of the year. If you are not required to file taxes normally (maybe you're a teenager or just make very little money), you have to file federal taxes if your business makes a profit of $400 per year. The IRS has a Self-employed Tax Center that can help you understand this requirement. If someone tells you that you don't have to report your business income unless it hits a specific threshold, they're not exactly wrong, but they're not exactly right either. Bottom line, if you have a day job and file taxes, include your business income no matter how small it is.

Estimated Taxes

If you don't make more than a few hundred dollars per year, you can probably get away with just adding it to your taxes at the end of the year. But, if you make over $1000 and don't report it until your annual filing period, there's a very good chance you'll be subject to an underpayment penalty. To avoid this, most small businesses file quarterly estimated taxes. The IRS Estimated Taxes page can give you more information on what forms and what system you need to use. If you expect to earn more than $1000 in the next year, get smart on estimated taxes and get set up to file every quarter.

State Requirements

Sales Tax

This is one of those things that can be ludicrously complicated. Any state that has sales tax is going to require that you collect it and pay them. If you're in one of the four states that have no sales tax (Delaware, Montana, New Hampshire, and Oregon), you are lucky. If you're in Alaska, which has no state sales tax, you might still have to collect sales tax for your local municipality. Every state has their own requirements, and the requirements can vary depending on your personal situation. Some states require monthly reporting, others quarterly. Some will let you pay quarterly once you have a history of paying on time monthly. Seriously, this can get messy and anyone who does not live in your city who gives you advice is probably wrong to some degree.

If you sell in more than one state, you will need to collect and report sales tax in each state. This is another reason to keep very good records on what you sell and where. If you sell all in one state but in different counties, you may need to report the different location sales separately.

Licensing

There is no general rule here. Most states do not require anything more than a sales tax certificate to start selling crafts at retail. Some local municipalities have licensing requirements that can vary wildly. You may not need a license unless you have an actual store; you may not need a license of any kind; you may need a license even at a craft fair. Most states do require that you file a "doing business as" assumed-name form if you are using any name other than the one on your birth certificate for your business. If you sell as "Crafts by Cathy," for example, you'd need to file a form at the county clerk saying you are doing so. There is no way to give generic advice here, other than to tell you to look it up and find the actual state or local requirements for yourself.

Pricing

Many people get started working with cord because it's a fun diversion, and end up with a lot of stuff cluttering the house. Others are looking for a business opportunity from the very beginning. Determining how much to charge for your products is sometimes confusing. Remember to not undervalue your own craft. You spent the time and effort to learn how to make these items; you deserve the credit (monetary and other).

A spreadsheet might help keep things straight, if you have a lot of items to track. An example is available for you to work from. Instructions are included in the spreadsheet, and it does all the math for you.

Costs

There are fixed and variable costs associated with any business. Fixed costs include any dedicated space or facility, utilities, or any other cost that you pay out of your pocket every day or month, whether you are selling anything or not. For most of us, we can ignore this, because we do this small business out of our home. If you do have a dedicated space or phone line, remember to consider those costs to not lose money. You may start selling at shows; if you buy a table or canopy, figure out how long you want to take to pay those off, and amortize the costs into your profit margin.

Variable costs are the big ones we all see. These are materials, supplies, and labor. Most cord crafters are single-person operations, so you may be tempted to ignore the cost of labor, but your time should be valuable to you. Supplies are things which you use for the craft but are not part of the finished product. These can include lighters, winders, rubber bands, any packaging you use, postage, etc. The simplest cost to figure out is material cost - you should have a pretty good idea of how much cord you use in an item, and how much that cord cost you.

Let's say you sell only bracelets. You don't do shows, so you have no table or canopy or exhibit fees to worry about. You buy cord in spools, and they cost $50 per 1000, including shipping (don't forget all the costs!). You use plastic buckles, and they cost you 25 cents each in bulk, including shipping. Each bracelet uses ten feet of cord, and takes you six minutes to make. You think a good wage is $10 per hour. So, this bracelet costs 75 cents in materials and 1 dollar in labor. You don't package the bracelet, and only sell locally. Your total cost is $1.75.

The cost of your own labor is important to consider for pricing, but for income tax purposes, it's not. The IRS will not allow you to write off your own labor as an expense - they're all about actual cash changing hands. However, if you are paying someone else, that's an expense for tax purposes.

Profit Margin

There are a lot of variables to consider when setting the final price. Most people want to make a reasonable profit, and still have room to offer discounts for large orders or loyal customers. A common rule of thumb is to have a wholesale price of double your costs, and a retail price that includes a healthy profit margin above that. Using our above example, the wholesale price is $3.50, so $5.00 or more for a retail price will give you plenty of wiggle room to have bulk discounts, short sales, or other promotions, and never drop below $3.50, so you will always make some money.

Another issue to consider is perceived value. You are making a hand-made product. You are part of a local economy, and you are a local artisan or craftsperson. These should make your product worth more to a customer than a mass-produced item at the local sporting good store, made in a far-off country. Also, you can provide a custom product that will fit your customers better than anything they can find at Wal-Mart. Furthermore, there are other artisans in the world whose work will be undervalued if you undervalue your own work.

Finally, there is the concept of "what the market will bear" to consider. There are some things which take a lot of time and effort to produce. If you price them in the same ratio as your simpler items, you may be surprised to find that you are asking someone to pay 75 dollars for a leash. In some cases, you may decide to not offer a product you know how to make, simply because nobody would be willing to pay what it is worth. Other times, you may decide to be flexible on what your labor costs are. As an example, the Conquistador braid is a tedious thing to make; with practice it may take an hour to make a bracelet which contains 12 feet of cord. So, the costs are $10 in labor and 85 cents in materials. Let's say $11, doubled to $22 for wholesale, and a retail cost of around $30. It's extremely unlikely anyone would see that much extra value in the conquistador over a solomon bar for $5 sitting right next to it. But, if your labor costs were $5 per hour instead of $10, you end up with a $12 wholesale cost or around $14 or $15 retail. That is easier for a customer to swallow, and you still make some money. If you're not willing to sell your labor that low, it's not a product for you.

Final Words on Pricing

There are many different approaches to pricing hand-made goods. This method is one common process, but others will use another approach. Another common system is to ignore labor costs, set a "cost" of double your materials, double that again for wholesale, and then set your retail above that. This would lead to our first bracelet above being $1.50 in cost, $3.00 wholesale, and probably still around $5 retail. Different paths, similar result. Of course, you still have to at least consider if something is worth your time. The conquistador example would end up, using this method, with a $3.40 wholesale price - you may want to adjust that upwards. Your own opinion on that will guide your final pricing.