Every once in awhile, a handy site called Lifehacker asks a question that I’ve asked myself, and today is one of those days for sharing. I know many fellow freelancers who read this blog will want to weigh in. Does this article take everything into consideration? In my opinion it is a great start. But there is something I will add below the fold. First, the article:
After years of working as a corporate slave, I’ve decided to make the jump and strike out on my own as a freelancer. I already have some people interested in my work, but I’m not really sure how much to charge. Do I set my rate based on what other people are charging? Or how do I come up with the best price to charge?
Bitten by the Freelance Bug
Congratulations and welcome to the exciting world of working for yourself. Putting a price on your services is one of the biggest challenges freelancers face. You don’t want to set your rate so low that your business won’t thrive, and it’ll be hard to raise rates later when your business becomes more established, but you also don’t want to set them so high you scare off clients. Here’s some advice on establishing what to charge. Whip out a pencil and paper, because we’re going to be doing some math.
1. Calculate How Much You’ll Need to Cover Operating Costs
Salary: How much do you want to earn (pay yourself)? You might take a look at your current salary or check out a site like Salary.com to find comparative wages. Let’s say, for example, you want to take home $45,000 a year. (If you were to hire someone to help you, also add a line for that employee’s salary, but for the sake of this example we’ll just stick with one staff member—you.)
Taxes: When you’re self-employed, you’ll need to cover your own taxes. The IRS has helpful information on self-employment and taxes, including a worksheet (PDF) for calculating estimated taxes. As a rule of thumb, though, you can simply add a factor of 15% to your salary to cover tax contributions. In our example, 15% times the $45,000 salary is $6,750. Adding these together, our new salary with taxes is $51,750.
Monthly overhead: Overhead costs are those that you’ll incur just in running the business. Depending on your situations, these may include:
- Office supplies
- Advertising or marketing
- Telephone fees
- Auto leases
Tally these all up and multiply by 12 to get your yearly overhead. Then add in any yearly costs, such as computer or software purchases. In this example, we’re going to say it’s $12,000.
2. Figure Out Your Average Billable Hours
Next, find out how many working hours you’ll have each year. You could take 40 hours a week and multiply by 52 weeks to get to 2,080, but you should also account for holidays, sick days, and vacations. Cameron S. Foote in The Business Side of Creativity suggests 1,920 hours, accounting for 48 working weeks.
Then you need to subtract non-billable time—time that you’ll spend each week doing things like hunting for new clients or filing paperwork that you can’t bill to a client. 20% is a good rule of thumb for those non-billable hours, so multiply that by your annual hours above. In our example, the total billable hours is now 1,152.
3. Add Operating Costs and Divide by Billable Hours
Now add your salary and overhead costs together. In this example, it’s $51,750 salary with taxes plus $12,000 overhead, for a total of $63,750.
Dividing $63,750 by 1,152 billable hours gives us an hourly rate of $55.34. But we’re not done yet!
4. Factor in a profit margin
You’ll also want to add in a profit margin of between 10% and 30%. The profit margin helps you build a reserve for when business slows. You might think you don’t need to add in a profit margin because you’ll be drawing a salary, but the additional profit is essential for future growth and also for obtaining loans.
Let’s say we want a 20% profit; 20% of $55.34 is $11.07, so your new, final hourly rate is $66.41. You can definitely round that out to $66 or $67.
Charging by project: If you don’t want to invoice clients with an hourly rate, all you need to do is estimate how much time you’ll spend on a project and then multiply by your hourly rate to get a price you can quote your client.
Think the Rate Is Too High?
Keep in mind that calculating your rate precisely this way is really important if you want your freelancing business to be successful, because it’s based on your actual costs and needs. While you may see others with lower rates than you (you’ll also see much higher ones too, no doubt), avoid the common new freelancer mistake of pricing your services so low that you’ll soon be scared back to the old 9 to 5 corporate world.
You can try several other methods for setting your rate, such as marking up your current salary (e.g., if you now make $15 an hour, charging double that, or $30) or just dividing how much you want to earn by how many hours you’ll work, but I wouldn’t recommend them because they’re not realistic; they don’t take into account your everyday expenses or account for long-term success.
And this is what we wish you. Good luck with your new endeavor!
Great article, but I think you also need to look at what others are charging for the same services. There is usually a range in what your competition is charging, and if you don’t know what it is you need to find out. Should you be at the high end of that range or the low end?
Do you offer something extraordinary that differentiates you from your fellow freelancers? Are you the new kid on the block, or are you a seasoned veteran with credentials and recommendations? Ask yourself these questions, and that number becomes clearer.
What other factors am I missing?