How to Calculate Your True Hourly Rate as a Freelancer
To many people, the idea of being your own boss sounds like a grand idea with many benefits. For one thing, working for yourself allows you to get out from underneath someone else’s rules.
But many people also have this grand idea that they are going to make several thousand dollars more per year working for themselves than they would if they were working for someone else.
It’s true there are benefits to working for yourself and some people do make more. However, when I began freelancing I discovered there are some drawbacks as well.
For instance there’s no paid vacation or sick days, no paid health insurance, and no retirement account. If I wanted these benefits I had to make enough to be able to pay for them myself.
This means I have to make a whole lot more money in order to pay for all of the benefits an outside employer would have provided. Granted, as the boss, I get to decide what I charge my clients so I can figure in all of those “benefits” to ensure I can cover them financially.
Of course, that means I need to be able to figure out my true hourly rate, even if I don’t charge clients by the hour. (I try to charge by the project.)
If you are wondering how to calculate your true hourly rate as a freelancer, here’s how to do it.
1. Determine an Annual Salary
Figure out how much you wish to make after business expenses have been deducted. Perhaps you decide you want to make $50,000 per year. While that sounds good, it need to be broken down somewhat or you’ll never know if you’re earning anywhere close enough per hour or per day to hit that goal.
2. Calculate Expenses
When you freelance, it’s easy to forget some of the expenses an outside employer would cover. They can include: office space, internet fees, software, hardware, accountant fees, cell phone expenses, advertising, taxes, health insurance, disability insurance, and more. These expenses can add up to be somewhere in the neighborhood of $22,000 per year.
3. Refigure Your Annual Salary
Add the first two figures together in order to realize how much you really need to make each year. In this case, $50,000 plus $22,000 gives you $72,000.
4. Estimate Your Billable Hours
Now you must convert that annual salary into an hourly rate. In order to do that, you need to know how many billable hours you could be charging.
If you work at a traditional job 40 hours per week multiplied by 52 weeks per year, your total comes up to 2,080 hours.
But, don’t forget that you will need and want to take time off!
Let’s say you would like to take 3 weeks off for vacation days and 7 days for holidays. In addition, you want to build in 5 personal or sick days. That comes up to 27 days you plan not to be working.
When you multiply 27 by 8 hours per day you arrive at 216 hours you aren’t working out of 2080. Your new figure is now 1,864 hours.
In addition, there are some hours when you’ll be doing background work such as making phone calls, sending emails, and doing other administrative functions. If you subtract 25% of your time for these tasks you get an adjusted figure of right around 1,400 billable hours annually.
5. Figure Your Hourly Rate
Now you can figure out what your hourly rate should be. To do that, divide your annual salary of $72,000 by 1,400 hours. The hourly rate you get from this calculation is $51.43 per hour. I would round this figure up to $55 per hour to give myself a little wiggle room.
That may sound like a pretty high figure to some people. Some clients may not understand all of what goes into that number, thus they may think $55 per hour is unreasonable. But, if you charge less than that, you are going to have to work more hours to make up for the difference.
Why You Shouldn’t Charge Clients Hourly
The problem is the number of hours you can physically work in any year are limited because you must have time to sleep and eat. In addition everyone needs a little leisure time to spend with friends and family, or to just do nothing but take a day off. This is why it isn’t necessarily the best idea to charge an hourly rate to your clients.
Other Ways to Charge Clients
But how do you charge differently? One way to get started charging differently is to do a little homework. Find out how much other freelancers charge for what they do. Look for information on the internet or ask a marketing consultant what they charge. You can also ask your clients what they have paid to other freelancers they have worked on projects with.
Another way to avoid charging by the hour is to put together packages of commonly requested services. Charge your clients by the page or the number of words in an article instead of charging an hourly rate for what you do.
In order to help you make more for what you do you can work in ways that help to increase your efficiency. One way is to put together a format that you commonly use to make your work easier and faster to perform. Then all you have to do is plug in the information rather than having to create a format along the way.
An additional idea is to use an invoicing system to cut down on administrative duties so you can more time doing actual client work that makes you the income you need.
A third tactic is to build some cushion into what you charge in case you need to negotiate your rate with a client. You should ask what you are worth plus a little. This way you can come down somewhat on your rates if you have a client who wants to haggle on what you charge. You can also charge more for work with tight deadlines. This can help your overall rate too.
Do you have a client who seems to require more of your time and attention? If so, you have the power to charge them more for it.
When it comes down to it, you can work as a freelancer, be your own boss, and get paid a reasonable wage. Yes, there are some drawbacks to working as a freelancer. But, I found that I love doing the work and the benefits far outweigh the negatives.
I do not charge my clients by the hour. Instead, I charge by the project to ensure I get paid what I am worth. If you are a freelancer or are interested in becoming one, knowing how to calculate your true hourly rate as a freelancer is important. It can help you determine what to charge your clients to make sure you are earning enough money.