Just to elaborate on Faye, the CPSIA pertains to anyone that sells, donates or in general gives away a product for children 12 and under that does not have the proper testing certificates on hand. See
http://cpsc.gov/about/cpsia/smbus/cpsiasbguide.html &
http://cpsc.gov/cpscpub/pubs/thrift/thrguid.pdf for the easier to understand guidelines. So while its fine to make your sock puppets for your own household, more or less once it's going to someone outside of the house it must be tested once the stay of lead testing is lifted or is made entirerly out of exempt materials. For right now for certain product catergories, unless there is any type of paint on the item, you don't need to test by a 3rd party lab, but you do need assurances from your suppliers that there is no lead, preferably in writting. There is no stay of testing for small parts or the phthalates so if your items fall into any of the catergories that require either type of testing then you really should have it done.
As for the second part of your query, I'm not sure about what NY's tax rules are, but here in NJ you can have a profitable hobby for 5 yrs before needing to file as a bussiness. All profits must be declared on your annual income tax as misc income both for the state and federal returns. The biggest difference is without the license you can not take any deductions that are normally associated with running a micro bussiness and you better have reciepts showing that you paid sale taxes for every single bit of the "raw" supplies that you use.
