Editor’s note: This post was written as an illustration as the application of math, economics, and explain Insanitek’s pricing. Times have changed, and thus so have tax rates. These prices are no longer accurate.
I am self employed, and I run my own company. Granted, I am a company of one with the intentions to hire more as I can afford to.
However, this dream has been slightly derailed due to increases in taxes required by the government to pay for everyone else’s healthcare (not mine since I can’t even afford a doctor).
Due to this crush, I am forced to raise prices to cover the Affordable Care Act, which you can read about here. This puts a payroll tax nearly double what it was. Outlined below is how we figure prices of items we make here at Insanitek. This does not include the prices of those we acquire from other manufacturers, as we just use their set price.
So, this is the formula of how we figure out the price for things:
(Price of raw materials + time to produce)*1% of overhead = starting price
starting price + (state taxes + city taxes + federal taxes) = base price
base price*10% = wholesale price
wholesale price + $4 = gift store retail price
If I sell the product anywhere else, I will, of course, raise the price to cover the amount of their fees.
Some of these terms need some explanation, and we’ll use something like our ever popular Pi Hat as a demonstration for the whole process.
The ball of Red Heart Super Saver Economy yarn costs $3.99 a ball, and I can make 1.5 hats out of it, and I use a little bit of scrap yarn (price negligible) for the accent pi symbols. So, the price of raw materials for this particular hat is $2.66.
The time to produce one hat is approximately 10 hours. IF I were to pay myself minimum wage ($7.25/ hour), the cost of time to produce would be $72.50. However, no one would ever pay that much for a mere hat since they all want the cost it takes to mass produce it. Thus, I have to pay myself slave labour wages which I figure up at the end.
So, we have ($3.99+0)* 1% of overhead. I have to pay my electric bills and things. This means that I can charge up to $2 for electric and $6.50 for rent, and $1 for Internet to post the listing. As a base price, we’re already up to $13.49. But, the government needs their cut of everything, so here we have to add that too.
Every year everyone has to pay city, state, county and federal taxes. At the time of writing this, I live in Indianapolis, Indiana, so I currently have to pay:
- 3.4% for city
- 1.15% for county
- 3.17% for state
- 1.45% for medical
- 6.2% for SS
- 3.44% for federal
This adds a 18.81% to each item. The reason it’s to each item is because the government comes after this percent, regardless of how much or how little I sell. So, if I sell one item, they still take 18.81% of the income. If I sell two items, they take 18.81% of the total income.
13.49*18.81% = 2.54
I add $2.54 for the government’s cut, getting $16.02.
OK, I know that $16.02 is way too low to be charging for a handmade item, especially from someone with my skill level. A quick Internet search reveals that a “reasonable” person would pay around $25 – $30 for a handmade beret. So, I can garner an extra $5 out of it for paying labour wages if bought wholesale (at $21 a hat), and $10 for buying at a retail price (for $26 a hat).
Tell me, would you work for 0.50 cents an hour? I didn’t think so. Lobby to give handmade items fair prices so I don’t have to run a sweat shop so you can get quality handmade goods at cheap machine manufactured product prices. In the mean time, I raised my prices a dollar each item to cover the prices of government bloat.