Most jewelry designers would rather eat their own foot than tackle the seemingly daunting task of accounting for their jewelry business. We creative types tend to be more comfortable with hands-on tasks than crunching numbers behind a computer. The truth is, however, that jewelry business accounting is a simple matter of keeping track of income and expenses. There really is nothing else to it.
Is Accounting for my Jewelry Business Necessary?
You need to track income and expenses for your federal tax return. If you do not, you could be subject to huge penalties from the IRS during an audit. At the end of the year, you will need a total for all of your jewelry business income, as well as related expenses such as components, office supplies, home office use, and utilities used for your business activities. You can also keep track of the mileage you use doing business activities such as traveling to craft shows or going on supply shopping trips. The IRS also requires you to provide a total dollar value for all of your jewelry supplies and finished pieces.
Can I Let my Accountant Handle Everything?
While you could probably get away with throwing all of your receipts in a shoe box for the accountant, it will be a big help to your business if you keep a close eye on incomes and expenses to see how things really stand. This does not mean you have to go buy expensive accounting software, though. A simple spreadsheet in Excel or Open Office will provide you with all the detailed information you need to make smart jewelry business financial decisions.
The Principles of Accounting for a Jewelry Business
There are just two basic things you need to keep track of: income and expenses. Income will be any jewelry sales you make. The sales tax you may collect on those sales is not considered income but needs to be tracked separately if yours is a state that charges sales tax. Expenses are any costs incurred to run your business, from jewelry components to internet access. For tax return purposes, you must have proof of these expenses, such as receipts or in the case of mileage, a detailed mileage log.
Before you set up your jewelry business accounting categories, it might be helpful to look at a Schedule C, which is the tax form most jewelry business owners will file for their business. Take note of the categories you will report on and align your own tracking methods to include those categories. This will make filing the return much easier since the information is already sorted the way you need to file it.
Some of the categories you will want to keep track of for both the IRS and your own accounting purposes include:
Components: This is your cost of buying jewelry supplies such as beads, tools, storage and stringing materials. Advertising Costs: If you buy an ad in the local newspaper or pay for Google Adwords ads to advertise your website, these are tracked under the general category of advertising costs. Commissions Paid: When you sell on a community marketplace like eBay or Etsy, you will pay that site a percentage of the sale in the form of a commission. This is important to track so you know how much it costs to sell each item. Fees: Accepting payments for your jewelry through PayPal or credit cards will result in fees, usually a percentage of the transaction amount. As with commissions, it is important to track this on a per-item level. Internet Access: If you use the Internet to run your business, you can deduct it as an expense on your taxes. Important: If you use the same Internet access for home and business, the IRS will allow you to deduct a percentage for business use. Come up with a reasonable formula and use it consistently through the year to calculate the business portion of your Internet access costs. For example, if you use the Internet about half the time for business, you can deduct 50% of your total costs as a business expense. Mileage: Any driving done for the sole purpose of business is deductible on your tax return. If you take a package to the post office, or travel to a bead show, you can track the miles driven and report them at the end of the year. The IRS requires you to keep proof of your miles in a mileage log with dates, descriptions and miles for each trip. You also need starting and ending mileage from your vehicle, so take note at the start of the year. Office Supplies: Paper, shipping labels, blank CDs for creating backups and other general supplies related to running an office will be deductible under this same category on your tax return. For your own accounting purposes, these expenses cannot be attributed to an individual jewelry piece but need to be tracked so you know your overall costs of operating your business. Shipping Costs: The only expense you may track in this category for your tax return is the actual cost of shipping, including stamps and postage purchases. General Supplies: Anything that does not fall into the other categories but is a valid business expense can be tracked with this category. Things such as a reference book or gift bags belong here. Income: All sales can be lumped under the broad umbrella of income, or you can narrow down your income into specific channels. Examples might include Etsy income, eBay income, craft show income, farmer’s market income and income from home shows. The IRS only needs a grand total of these sales, but you will probably find it helpful to know just where your income is coming from so you know where to focus your marketing efforts.
You may break these categories down further or add some of your own as you progress with your business, but these should be a good start in accounting for your jewelry business.
It is important to track inventory for your jewelry business, both for the IRS and for your own sanity. With so many components involved in the creation of a jewelry piece, keeping track is critical in knowing when to reorder and what items you just are not using. You also need to know the costs of each supply so you can accurately price your jewelry.
The IRS will require a total value of both your jewelry supplies and finished pieces. If you start out keeping track of components, you will save yourself a major headache when tax time comes. Trust me, counting out thousands of daisy spacers is not a fun way to spend time. As an aside, if you have a postal scale and need to count large quantities of beads, try weighing 10 or 20 and then weighing the whole lot to get a pretty close estimate on the total amount.
You can buy special software to track your inventory and jewelry pieces for you. A popular program is Jewelry Designer Manager, which allows you to include photos and descriptions of your components and finished items. You can even export your pieces into a PDF catalog for showing customers
If you prefer a simpler method of tracking your jewelry inventory, Excel or Open Office spreadsheets are quick, easy to use and very cost effective. You can track as little or as much as you like, but the key information you need is the component name, cost each and total on hand. You can add extra columns for size, purchase date, supplier name, part number and any other information that will help you keep track. Just make sure you have the current totals ready for tax time and filing the inventory portion will be a simple as pasting a number into the right field.
Most tax software companies limit their free returns to simple household returns. Once you add the business forms, you will find you have to pay if you want a software program to help you file your taxes. In most cases, Turbo Tax is a very adequate and easy to use tax program to file a business return. This is what I have used for years with no problems. I like the interface and the deduction finding capabilities. The cost is around $100, which can be a substantial savings over hiring an accountant. On the other hand, an accountant will guarantee the accuracy of your return and you will have a professional to rely on every step of the way.
Accounting for a jewelry business really is not all that complicated. It is only slightly more involved than keeping track of your personal checking account register, but the information it provides you can help you see where your business is doing well and where you may need to cut costs. By keeping track as you go, you will also eliminate the end of the year rush and reduce your tax time stress level considerably.