How to Properly Sand and Finish Wood with Shellac?

Sanding at 220 before your finish is totally fine, but after the shellac, I recommend using 400 or 600 grit. If you go coarser than that, you might end up removing too much of the shellac. If you're having issues with drips or runs, try to be more careful in your application. Remember, a light touch will help with the balling up issue you mentioned. For your top coat, just sand with 400 or 600 in between coats, and wet sanding will help keep the dust down and reduce corning.

Before the final finish, I usually lightly wet the wood to raise the grain and sand it back down. It helps prevent the finish from raising the grain later. For the last coat, I like to use steel wool instead of sandpaper—it's easier to control how much you're sanding, and it scuffs the surface nicely. I wouldn't go beyond 220-250 grit for applying the finish. Going too fine, like 3000, is more for polishing after your finish is applied, not before.

First off, I suggest mixing your own shellac flakes; it gives you more control. As for sanding, you generally only need to sand after the first couple of coats of shellac which raise the grain. If you're finding that your sandpaper is loading up, it might just need more time to cure. My routine is to apply 2-3 shellac coats, followed by a couple of coats of water-based polyurethane for durability, but again, light sanding is key.