How to determine what your freelance rate is by factoring in business costs, and the amount of hours that you can bill in a year.
This article was written by featured writer Ashlee Christian
Deciding how much to charge for your services is one of those quandaries that can lead to much hand wringing and inner turmoil. There’s a lot to second guess and a lot of “what ifs” to consider. However, we don’t have to torture ourselves dear freelancers, by employing a few simple formulas we can figure out how much to charge that not only factors in various business costs, but also what you as an individual needs to not only survive, but thrive.
Determine your yearly salary
If you are looking to venture forth into freelance from a full time job, presumably you are not looking to take a paycut, so why not give yourself a raise? You can do that, you’re the boss! Let’s say you were making $90,000, but you’ve really been kicking ass, so you’ve decided to give yourself a $10k raise, and set your yearly salary at $100,000.
Identify all your business costs
As a regular ole’ full time employee who makes a salary, it can be easy to forget about all the other costs that a company invests in you, in the form of payroll taxes, health insurance premiums, desk space, etc… As a freelancer, you are on your own for all those costs. So figure out what those are, which for a freelancer might include (but not be limited to):
- Web hosting
- Desk / office space (if you don’t work from home)
- Project management tools / other software subscription and licenses
- Computer equipment
- Health Insurance
- Taxes (which will be dependent on how you structure your business)
Really take stock of all of those business incidentals which can add actual tens of thousands of dollars of cost to your business. So that base of $100,000 might more accurately need to be $120,000 (look at you, another raise so soon!).
Remember that you are not a robot
A full time salary that includes PTO factors in you working 40 hours a week every week of the year. One of the upsides of this model is that you might not be SUPER productive, or even working (if you’re sick or on vacation) all 40 of those hours, but you still get paid for them. As a freelancer, time is actually money, so if you aren’t working you aren’t getting paid. Furthermore, “working” hours may not be actual billable work, but administrative things that you need to do in order for your business to function like invoicing, accounting, email, etc…
There are roughly 250 working days in 2018 (ie: what you would be working at a typical 9–5, weekdays minus major holidays). 250 x 8 = 2000 hours. From there decide how many hours you estimate that you can actually bill, which would subtract vacation, sick days, playing hooky, administrative tasks, etc… So let’s say we are going to factor in 20 days of PTO and 8 hours a month for administrative tasks, that would come out to 1,744 yearly billable hours.
Calculate your hourly rate
Okay so we’ve determined our yearly salary ($100,000), our yearly business expenses ($20,000), and the amount of hours we estimate we can bill (1,744).
$100,000 + $20,000 / 1,744 = $68.80 / hour (you’ll probably want to round up to $70, or $69 if you’re feeling kinky). You can also let this handy calculator math for you once you’ve determined all of the different factors and costs.
Calculate fixed project costs
Depending on the job, you may want to charge a fixed amount as opposed to an hourly rate. Some clients would rather cap services to a certain budget that they have, so an hourly rate might not sit well with them if they think you will exceed the number of hours budgeted. Furthermore, you might have a few things that you’ve done a TON of and know exactly how long it takes you, so instead of charging $70/hour for a logo that you know will take you 4 hours to complete, you may just charge $300 instead (which is a nice even number that makes you an extra $20 than your hourly would have).
Get paid AF
Remember that decisions are best made with the most amount of data at hand. So if people ever balk at you about what your rates are you can lay out the facts straight for them on how you came to that number and why it makes sense for you and your business. Sure there are times that you might offer a client a discount, or throw a friend a free whatever, but at the end of the day you have to remember that nobody is paying you a salary just to show up and exist, so you need to be smart about how you determine what you charge.