Record Keeping for Your Craft Business — A Practical Guide
Good record keeping for your craft business means tracking income, expenses, COGS, and inventory — so tax time doesn't become a crisis. Here's exactly what to track and how.
When you’re in the middle of building a craft business, record keeping is one of those things that’s easy to put off. You’re busy making things, shipping orders, sourcing materials. The admin can wait.
Then tax time arrives — and it doesn’t wait.
Good record keeping for your craft business isn’t just about satisfying the IRS. It’s the difference between knowing if your business is actually profitable and just hoping it is. It’s how you find out you’ve been losing money on your best-selling candle. It’s how you avoid a frantic scramble every April trying to reconstruct a year’s worth of expenses from bank statements and PayPal emails.
This guide covers what to track, how to organise it, and the practical systems that make it manageable — even if admin isn’t your strong suit.
Last updated: April 2026
Separate your business and personal finances
This one comes first because it’s foundational. If your business and personal money are mixed together, every other record keeping task becomes harder.
Open a dedicated bank account for your business — or at minimum, a PayPal account that you use exclusively for business income and expenses. The goal isn’t complexity. It’s clarity. When you need to pull together a year’s expenses, you want one place to look, not twelve.
A word of caution: many countries and states disallow business expense deductions on tax returns if you can’t demonstrate the expense was directly business-related. Mixed accounts make that very hard to prove.
Choose the right business structure early
Your business structure affects what you report, how often you report it, and what protections you have. Getting this sorted early saves a lot of painful backtracking.
The two most common options for small craft businesses are:
- Sole proprietorship — simple to set up, but you’re personally liable for any business debts or legal issues
- LLC (Limited Liability Company) — more protection for your personal assets, slightly more administrative overhead
If you’re unsure which is right for you, this post on choosing the right structure for your handmade business walks through the tradeoffs in detail. The short version: if you’re just starting out and keeping things small, sole proprietorship is fine. Once you’re doing serious volume or carrying significant inventory, an LLC is worth the setup cost.
Track your income by channel
Most craft businesses sell across multiple places — Etsy, Shopify, local markets, maybe wholesale. Each channel has its own fee structure, payout timing, and reporting quirks.
For each sale, you want to record:
- The date of the sale
- Which channel it came through
- What products were sold and in what quantities
- Any discounts applied
- Sales tax collected (if applicable)
- Shipping charged vs. actual shipping cost
The fees each platform takes matter more than most makers realise. Etsy alone has listing fees, transaction fees, payment processing fees, and offsite ads fees — and they change. We’ve put together a complete guide to Etsy fees if you want the current breakdown.
Understanding exactly what each channel actually pays you (net of fees) is the only way to know which channels are worth your time.
Keep your receipts and track expenses
Receipts are your proof that a business expense happened. The IRS may request them if you’re audited — and “I think I spent that on packaging” is not an acceptable substitute.
For digital purchases, the simplest approach is a dedicated email folder. Every order confirmation, invoice, or receipt goes there, labelled by month and year. For physical receipts, scan them immediately (your phone camera works fine) and file them digitally. Paper receipts fade and get lost.
Tools worth knowing:
- Expensify — good for receipt scanning and tracking, has a free tier for low volume
- A shared Dropbox or Google Drive folder — fine for most small businesses, especially if you’re systematic about naming files
- Your accounting software — many handle receipt attachment directly
Whatever you use, make sure you can find a specific receipt quickly. “Somewhere in my email from 2024” is not a system.
Calculate and track your Cost of Goods Sold (COGS)
This is where most craft business record keeping falls apart — and where the financial stakes are highest.
If you manufacture products from raw materials (which, if you’re reading this, you almost certainly do), you are required to track your Cost of Goods Sold and report it on your annual tax return. The IRS is quite clear on this: even small makers must track inventory, regardless of revenue level.
COGS for a handmade business includes:
- Raw materials used — not just purchased, but actually consumed to make the products you sold
- Direct labour — your time or the time of anyone you pay to help manufacture
- Manufacturing overheads — packaging, utilities, equipment depreciation that’s directly tied to production
The tricky part is that COGS follows the products you actually sold, not just the materials you bought. If you bought $500 of soap base but only sold half your batch, you can only claim half that cost as COGS. The rest is still sitting in inventory.
Spreadsheets can handle this for very small operations, but they get unwieldy fast. The calculation requires knowing the exact material cost in every batch of every product — which means tracking recipe usage, material prices, and stock movements together. Tools like Craftybase automate this: you build your recipes, record your manufactures, and the COGS figures track themselves.
The inventory tracking requirement
Worth being direct about this: a lot of craft sellers assume inventory tracking is optional until they’re “big enough.” The IRS doesn’t work that way. If you produce goods from raw materials, you’re operating as a manufacturer — and manufacturers must track inventory using IRS-approved methods.
The good news is that getting set up early is much less painful than trying to reconstruct inventory history years later when the ATO or IRS comes asking.
Record your material purchases and stock levels
Every time you buy raw materials — thread, wax, fragrance oils, fabric, gemstones — that purchase needs a record. You want:
- What you bought
- How much (quantity and weight/volume where relevant)
- What you paid, per unit
- Which supplier
- When it arrived
This isn’t just for tax purposes. Knowing your stock levels in real time means you don’t run out of your bestselling material mid-season, and you don’t tie up cash buying things you already have plenty of.
Manual stock tracking in a spreadsheet works when you have a handful of materials and make things infrequently. It breaks down the moment you’re running multiple products with overlapping ingredients and regular production runs.
Stay compliant with product-specific regulations
Record keeping in a craft business isn’t purely financial. Depending on what you make, you may have regulatory obligations around what you document about your products.
Personal care products (soaps, lotions, cosmetics): You’ll want to keep detailed batch records — exactly which materials went into each batch, at what quantities, with which lot numbers from your suppliers. Under GMP (Good Manufacturing Practice) guidelines, this documentation exists so you can identify and recall specific batches if a problem arises.
Fabric and textile products: The CPSC (Consumer Product Safety Commission) has labelling and testing requirements for many textile items, especially anything marketed to children.
Food products: Cottage food laws vary by state, but most require ingredient and allergen labelling, and some require production records.
If you sell products that go on or in people’s bodies, lot tracking isn’t optional — it’s the safety net that protects both your customers and your business. Read more about why a lot tracking system matters for makers.
Use software that does the work for you
A lot of makers start with spreadsheets. They’re free, familiar, and fine for the first six months. The problem is that spreadsheets don’t talk to each other. Your materials spreadsheet doesn’t know about your sales. Your COGS estimate doesn’t automatically update when material costs change. Tax time means manually reconciling three different files and hoping the formulas are right.
Specialised inventory and manufacturing software for craft businesses handles all of this in one place:
- Tracks material stock as you manufacture, automatically deducting quantities from inventory
- Calculates COGS per product based on actual recipe usage and current material costs
- Imports orders from Etsy, Shopify, and other channels
- Generates Schedule C-ready financial reports
If you want a comparison of your options, our guide to inventory management for makers covers the main tools with honest pros and cons.
Frequently Asked Questions
What records should a craft business keep for taxes?
At minimum, you need records of all business income (by channel), business expenses (with receipts), material purchases, and your Cost of Goods Sold calculation. If you manufacture products, you also need records of your opening and closing inventory each year. The IRS requires COGS reporting on Schedule C for any maker who produces goods from raw materials — and may request supporting records if audited.
How long should a craft business keep financial records?
The IRS recommends keeping business records for at least three years from the date you file your return — that's the standard audit window. Keep records for six years if you underreported income by more than 25%. In practice, most accountants suggest holding onto everything for seven years just to be safe. Digital storage makes this straightforward — scan your paper receipts, back up your files, and don't delete anything.
Do I need to track inventory if I'm a small craft seller?
Yes — IRS Publication 334 is clear that any business that produces goods from raw materials must track inventory, regardless of revenue. There's no "small enough to skip it" threshold for makers. Inventory tracking is also how you calculate your COGS accurately, which directly affects your tax liability. Getting set up early is far less painful than reconstructing years of inventory history when you actually need the numbers.
What's the best way to track expenses for a craft business?
The most reliable approach is a dedicated business bank account or card — everything in, everything out through one place. Pair that with a simple receipt system: a dedicated email folder for digital receipts and a phone scanner (or Expensify) for paper ones. Organised by month. The goal is to be able to pull up any receipt in under two minutes. If your current system can't do that, it needs work before tax time arrives.
How do I calculate COGS for a handmade business?
The basic formula is: COGS = Opening Inventory + Purchases − Closing Inventory. For a handmade business, "purchases" includes raw materials, and you need to track exactly which materials went into which products. That means maintaining recipes (or bills of materials) for every product, tracking material costs per unit, and recording each manufacturing run. Tools like Craftybase do this automatically — your recipes deduct from stock and COGS calculates itself as you manufacture and sell.
Can I use a spreadsheet to manage craft business records?
Spreadsheets work fine when you're just starting out with a handful of products and low sales volume. They stop working well once you have multiple products with overlapping materials, regular manufacturing runs, or orders coming in from more than one channel. At that point, the manual data entry is slow, the formulas are fragile, and COGS calculations become error-prone. Specialist tools built for makers handle all of this in one place — and they're not expensive relative to the time they save.
Good records aren’t glamorous. But they’re what separates a craft hobby from a craft business — and they’re what gives you the confidence to know your numbers, price your products right, and actually keep what you earn.
Start simple. Keep business finances separate. Save every receipt. Track your COGS. And if you’re at the point where spreadsheets are slowing you down, try Craftybase free for 14 days — no credit card required.
