Eric - I most always use a vinyl mask to do this. Do a search on Avery mask and Gerber mask and you should have a lot of threads pop up on the subject.
I paint my flat surface first before carving. Once the paint is completely cured, I apply the vinyl mask to the flat surface. You have to really apply pressure to the mask with a roller or a plastic putty knife. This helps it to completely adhere and remove all the air bubbles. For me, it seems to help if you let the mask sit on there a few hours. After that, you simply V-carve through the mask. If you have a sharp bit, you should have nice clean cuts in the mask. At this point you can spray some shellac or sanding sealer on the v-carve area. This just helps to seal the edges of the mask so that your paint doesn't bleed onto the flat surface that you already painted. After that sealer is dry, you can paint the v-carve letters and not have to worry about getting paint on your flat area. Once the paint is dry just peel off the mask and you are done.
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