I just moved out to SF and I am looking for new opportunities. So naturally, I am talking with everyone. I took a brief call with a local recruiter this week and I want to share a part of our conversation that I had with him.
Recruiter: How much were you making at your last fulltime employment?Kennedy: I was making $201,600 for my base at WeWork.
R: So your freelance rate should be about $100/hr.
K: What? No.
R: Well the rule of thumb is that you divide your annual salary in half to come up with your hourly, which ends up around the same amount at the end of the year.
I get how this is simple math:
$200,000 a year / 52 weeks = $3,846.15 per week / 40 hours = $96.15 per hour.
… but I think he is wrong. I think it’s important for individuals new to working in the freelance world to understand why your hourly rate is not just half your annual salary. I tried to explain this to him, but he insisted that it is the industry standard. Maybe I shouldn’t blame him or maybe I should as he is supposed to be representing the creative. Either way, he is wrong. Simple math is not the solution. You have to factor in risk and other benefits you are missing out on. Let’s go over some of those things now.
Depending on the state, you can have fewer rights as a freelancer/contractor. If they decided to end the project early, you will not get a severance package. You have to worry about tax implications. You have to worry where your next gig comes from after your contract expires. You have to worry about when they pay you. Some companies take 60 days to pay your invoice.
Often times you are not working 52 weeks a year and sometimes you're not billing 40 hours a week.
According to the U.S. Bureau of Labor Statistics, on average most individuals are granted 10 days of paid vacation per year. You don’t have the benefit of paid vacation days or sick days.
According to the Kaiser Family Foundation, the average monthly cost of health insurance (including employer and employee contributions) for an individual in 2018 was $574 per month and family coverage averaged $1,634.
According to Fidelity, the average company match is 4.7% to employer-sponsored 401(k) plans.
… and more
Those are the main items I can think of off the top of my head. Other financial items can include equity, commuter benefits, and bonuses. Of course, there are other nondirect financial benefits you are missing out on such as team off-sites, team dinners, and other little perks.
There is more to simple math when figuring out your hourly rate. Don’t let someone try to persuade and tell you that it’s based on an oversimplified formula. This is your money and you have to watch out for it.
In spite of this, I love freelancing. It opens the possibility of learning new techniques, working in new industries, and working with new talented people. If you run your freelance career like a business you should be able to make plenty of money to cover your expenses, pay for healthcare, put money into savings, and invest.
If you are a freelancer wanting a sanity check about your rate or if you have other freelance questions I would be more than happy to chat with you.