Calculating Your Target Hourly Rate: The Framework for Pricing Everything
You want to earn $60,000 this year. You work 50 hours per week. Simple math says you need $23.08/hour, right? Wrong. After taxes (30%), non-billable time (40%), and business expenses ($12k/year), you actually need $57.69/hour just to hit your goal. Here's the real formula.
Your target hourly rate is the single most important number in your handmade business. It determines your product pricing, profitability, and whether you're building a sustainable livelihood or an expensive hobby. Yet most makers have never calculated it correctly.
They guess. They look at competitors. They pull a number out of thin air—"$25/hour sounds reasonable." Then they wonder why they're working 60-hour weeks and barely making minimum wage. This guide gives you the exact formula to calculate your target rate, backed by real math and maker-specific considerations.
The $40,000 Miscalculation
Jessica makes pottery. She wants $60k annual income. She calculates: 40 hours/week × 50 weeks = 2,000 hours. $60,000 ÷ 2,000 = $30/hour. She prices all her products based on $30/hour labor.
Reality check at year-end:
- • Only 55% of her time was actually billable production (1,100 hours)
- • Self-employment taxes ate 15.3% ($9,180)
- • Income taxes took another 15% ($9,000)
- • She had $8,000 in business expenses not covered by pricing
- Actual take-home after expenses and taxes: $33,820
She missed her goal by $26,180—a 44% shortfall—because she didn't account for taxes, non-billable time, and business expenses.
The Complete Target Hourly Rate Formula
Target Hourly Rate = (Income Goal + Business Expenses) ÷ Billable Hours ÷ (1 − Tax Rate)
This is the hourly rate you must charge to achieve your income goal
Step-by-Step Breakdown:
1. Annual Income Goal
How much you want to take home (after taxes) for personal use
2. + Annual Business Expenses
Overhead costs not directly in product COGS (rent, software, marketing). This is separate from the materials and direct labor in your monthly P&L
3. ÷ Annual Billable Hours
Not total hours worked—only hours spent on revenue-generating activities
4. ÷ (1 − Tax Rate)
Gross up for taxes so you hit net income goal after IRS takes their cut
Component 1: Define Your Annual Income Goal
This is personal—what you need/want to take home after taxes for living expenses, savings, and lifestyle. Be honest and realistic.
Income Goal Benchmarks:
Important: These are post-tax numbers. If you want $60k take-home, you need to earn ~$80k gross before taxes.
Don't Forget Health Insurance & Retirement
W-2 employees get benefits. As a self-employed maker, you're on your own. Add these to your income goal:
- • Health insurance: $400-800/month ($4,800-9,600/year)
- • Retirement savings: 10-15% of income ($6,000-12,000 for $60k earner)
- • Disability insurance: $50-150/month ($600-1,800/year)
Total benefits burden: Add $11,400-23,400/year to your income goal if you want equivalent compensation to a salaried job.
Component 2: Add Annual Business Expenses
These are operating expenses not directly tied to producing specific products (those go in COGS). Think: fixed overhead and administrative costs.
Common Business Expenses:
- • Studio/workspace rent: $3,600-12,000/year
- • Utilities: $600-1,800/year
- • Software & tools: $500-2,000/year
- • Marketing & ads: $1,200-6,000/year
- • Professional services (CPA, lawyer): $500-3,000/year
- • Insurance (liability, property): $400-1,500/year
- • Equipment depreciation: $500-3,000/year
- • Education & training: $300-2,000/year
Typical Annual Overhead:
Component 3: Calculate Annual Billable Hours
This is where most makers go wrong. They confuse total hours worked with billable hours. Billable hours are time spent on revenue-generating activities: making products, fulfilling orders, client consultations.
The 60% Billable Rate Reality
If you work 40 hours/week, only ~24 hours are actually billable. The rest goes to:
- • Admin: Emails, invoicing, bookkeeping (15% / 6 hrs)
- • Marketing: Photos, social media, SEO (15% / 6 hrs)
- • Operations: Sourcing materials, organizing workspace (5% / 2 hrs)
- • Learning: R&D, skill development (5% / 2 hrs)
Total non-billable: 40% (16 hours/week)
Billable Hours Calculation:
Note: We use 50 weeks (not 52) to account for vacation, sick days, and holidays.
Component 4: Account for Taxes
Self-employment taxes are brutal. You pay both the employer and employee side of Social Security and Medicare (15.3%), plus federal income tax (10-22%), plus state income tax (0-13% depending on location).
Typical Tax Burden for Makers:
Conservative estimate: Use 30% for planning purposes unless you're in a high-tax state (CA, NY, NJ), then use 35%.
Putting It All Together: Real Examples
Example 1: Part-Time Maker (20 hrs/week)
Translation: To take home $30k working part-time, you must charge $83/hr for billable work.
Example 2: Full-Time Maker (40 hrs/week)
Translation: To match a $60k salaried job with benefits, you need $104/hr—not $29/hr ($60k ÷ 2,080 hours).
Why Most Makers Charge 60% Less Than They Should
The typical mistake: Calculate $60k ÷ 2,000 hours = $30/hr. This ignores:
- • 40% non-billable time (should be 1,200 billable hrs, not 2,000)
- • 30% tax burden (should gross up to $85.71/hr pre-tax)
- • $12k business expenses (should add to income goal)
- • $15k benefits cost (should add to income goal)
Result: Charging $30/hr when you need $103/hr = working for 29% of what you're worth.
How to Use Your Target Rate
1. Product Pricing
If a product takes 3 billable hours and your target rate is $100/hr, labor cost = $300. Add materials + overhead = minimum price.
2. Custom Order Evaluation
Client wants custom work for $500. It'll take 8 hours. $500 ÷ 8 = $62.50/hr. Below your $100 target? Decline or quote $800 minimum.
3. Efficiency Decisions
Should you buy a $2,000 tool that saves 3 hours/week? Yes—it pays for itself in 6.7 weeks ($2,000 ÷ ($100/hr × 3 hrs)).
4. Hiring Decisions
Can you delegate $25/hr tasks (packing, shipping) while you do $100/hr work (production)? Absolutely. Net gain: $75/hr.
When to Raise Your Target Rate
- Skill improvement: You're 30% faster/better than last year
- Demand exceeds capacity: 4+ week backlog consistently
- Cost of living increases: Annual inflation adjustment (3-5%/year)
- Market positioning: You've built a premium brand
- Certifications/awards: External validation of expertise
TrueCraft Calculates Your Target Rate Automatically
Instead of manual spreadsheet calculations, TrueCraft's Labor Rate Calculator:
- Asks for your income goal, expenses, and available hours
- Automatically applies billable rate adjustments (tracks your actual billable %)
- Factors in your local tax rates (pulls from your business address)
- Updates in real-time as your business changes
- Applies your target rate to product pricing automatically
Price Your Time Right—Automatically
TrueCraft calculates your target hourly rate based on real income goals, billable hours, and tax burden. Never underprice your labor again.
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