One of the biggest hurdles for design professionals considering starting their own business is truly understanding their financials. For years, this single fear prevented me from taking the leap. The thought of leaving a steady paycheck for uncertain financial territory was daunting and made for an easy excuse to postpone my plans.

Perhaps you feel the same way.

But it’s simpler than you might think to calculate the income you need to replace your paycheck. Here’s how:

Step 1: Calculate Monthly Needs

For this example, let’s assume you need your business to net $100,000 after taxes annually. While there are 12 months in a year, you’ll want to base your projection on 10 months to account for vacations, breaks and the fact that not every hour you work will contribute to your bottom line. This means you’ll need to net $10,000 per month over those 10 months to meet your annual goal.

Step 2: Estimate Your Tax Liability

Next, you’ll also need to factor in taxes. Let’s assume Federal tax at 24%, State tax at 5%, and Self-employment tax at 15.3% (1/2 of which you can claim as a deduction, so effectively this is 7.65%). Together this is a combined rate of 36.65%

Ignoring this in your calculations could be a costly mistake!

Because the US tax system is progressive and grants deductions for SE tax, this isn’t a straight forward calculation, but roughly the total tax = $58,000 ($24,332 Federal + $6,878 State + $24,195 SE)

Here’s the math:

Net Income = Gross Income (x) - Total Tax
$100,000 = x — 0.3665x (from above)
$100,000 = 0.6335x
x = $100,000/0.6335
Gross Income (x) = $158,000

This means you’ll need pre-tax earnings of approximately $158,000 or, $15,800 per month (dividing the total by 10 months) to net $100,000.

→ PRO TIP: use ChatGPT to quickly run the math for your own numbers.

Step 3: Estimate Expenses

You’ll also need to cover expenses and add this to your required monthly gross revenues. Expenses can vary wildly, but they’re not difficult to estimate (qualified expenses via the IRS) and if you’re bootstrapped I recommend you plan to keep things as lean as possible. For this example, let’s assume you can get by with $1200 per month in expenses. Calculate yours and adjust accordingly.

Step 4: Determine Necessary Revenue

Next, add the calculated expenses to the $15,800 + $1200 = $17,000 in monthly gross revenues or $170,000 annually to cover all expenses, to pay your taxes and post $10,000 in profit each month you’re actively working (remember, you’re working 10 months, not 12.)

In practice, your earnings will be lumpy with some months leaner than others, but we’re setting a course here, these are starting KPIs (Key Performance Indicators) to work with.

Step 5: YOUR MLE + HOURLY rate

Understanding your Minimum Level of Engagement (MLE) is essential for hitting your revenue goals efficiently. Set your MLE too low and you’ll have a roster filled with smaller projects with shorter durations, lower fees, and higher switching + marketing costs. Opting for a higher MLE will select for larger projects. There are fewer of these clients and they have longer sales cycles, but they also incur lower switching costs and you’ll need fewer of them to hit your KPIs. Less marketing and lower churn is good for business and your own sanity!

Your operational MLE must match the revenue target from Step 4 ($17K per month or $170K per year). Calculating your effective hourly rate is critical to align your workload with these revenue goals.

Here’s why…

Let’s assume you bill out your time at $150 per hour, you’ll need to work approximately 113 billable hours each month to reach your $17K goal. That’s about 28.25 hours per week or 5.5 hours per day. That means 70% of your time each day must be billable. This is also known as your utilization rate. While possible, this is a pretty aggressive target given the other responsibilities you’ll have as a business owner.

To be more realistic, consider a 60% utilization rate.

This would require adjusting your billing approach to either:

Increase Your Hourly Rate: Raise it to approximately $177 per hour to maintain a balanced workload. Or,
Increase Billable Hours: Alternatively, you could work around 189 billable hours per month, but that’s a 47 hour work week (that’s all billable). Not ideal.

Knowing this will help you set an MLE and select projects that align with your goals.

Larger Projects: A single project valued at $1.7M at a 10% fee would gross $170,000 over two years, provide $85,000 per year or $8,500 per month. You would need two such projects annually to meet your revenue target. Or, you could target one larger project ($3.5M+) providing $175,000 annually.
Smaller Projects: You may also choose to set the floor lower, let’s say ($1.5M each) which selects for shorter durations (let’s say 18 months) which would net $8333/month at a 10% fee. This option can cover your revenue goals while managing periods when client responses or contractor pricing might cause delays and you need to switch to another project running concurrently.

If all this sounds too complicated, I’ve made a plug-and-play spreadsheet and short tutorial video to help you calculate an hourly rate that accounts for: overhead, profit and expenses. You can grab that here.

Download the Profit Toolkit

If you choose to work on a fixed fee basis, you still need to understand your effective hourly rate to ensure they are set high enough to meet your financial goals and reflect the true value of your time and expertise.

When working on a fixed fee basis, you agree on a total project price regardless of the time spent. This can simplify budgeting and provide clients with cost certainty. However, it puts the risk on you to manage time and labor costs efficiently, as underestimating the required effort can dramatically reduce your effective hourly rate and cause you to miss your KPIs. How good are you at estimating the time it will take to achieve a design your client will approve? What happens when they change their mind? How many options will you give them? These are all questions that complicate the implementation of the fixed fee model and they’re part of the reason I still bill for my time on an hourly basis.

What’s next…?

With these financial calculations, you now have clear targets to work toward. Importantly, this clarity makes you less likely to undercharge for your work and serves as a framework for discussions with clients who want to negotiate your fee.

Given the example above, your profit margin = ($100,000/$170,000) × 100 = 58.82% ! Which means for every invoiced dollar:

$0.06 goes to expenses
$0.36 goes to taxes
$0.58 is profit

I hope this example provides a straightforward method to align your projections and goals for your business (whether real or imagined) and confidence that the math involved isn’t difficult.

By breaking it down into manageable steps, you can confidently navigate your financial planning and move on to map out the marketing efforts you’ll need to fill your revenue pipeline with new projects + clients.

Disclaimer: This is not financial, legal, or tax advice. Everyone's tax situation is different, and this example applies to individuals in the USA. Consult an accountant, business tax professional and/or financial advisor for personalized advice.