Step 3Drilling
Even if you do have the right size drill bit for the job, you might want to consider rounding the top of the holes if you also are going to upholster your thread rack in order to leave a little room for fabric and batting.
If your wood can handle it, I suggest drilling all the way through to the other side. This could be helpful later, and even if it's not, overall it really can't hurt. I decided to drill all the way through when I thought I might need wood glue to secure the dowels and would not be able to apply it on the top with the upholstery. While I did not end up needing wood glue, it was helpful when I was puncturing the fabric to insert the dowels as I needed to be able to push my tool all the way through to work properly.
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For the ones I built, I just used the board, sanded and stained - no covering required. The dowels were only about 2" long and drilled 1/4 to 3/8" deep.
Seriously, though, I'd put some scrap wood under what you're drilling to stop yourself from drilling a hole through the carpet - not to mention getting saw dust pretty deep into the fibres.