If you want to start a freelance business, you'll need to decide on a suitable rate so that you make enough money to cover your living expenses and meet your financial goals. While you might feel tempted to go by the rate you earned as an employee, you'll find that being a freelancer comes with several expenses and some extra taxes that you likely didn't incur as an employee. So, calculating freelance rates requires thoroughly planning for such extra costs along with researching market rates and accounting for time off. Take a look at the steps you should take in the process.
Considering Your Freelance Income Goals
Before you start exploring market rates or freelance pricing models, you should consider how much money you want to earn as a freelancer and the amount of time you want to spend working. This means considering how much money your lifestyle requires upfront so that you get enough to cover your bills, have funds to save and have enough left over for your hobbies and other wants.
If you've worked as an employee, starting by considering your current salary is a good rule of thumb since you'd be familiar with how that amount of money covers everyday costs. However, you may set your freelance income goal higher or lower depending on how much you plan to work and the going rate for freelance services of the type you'll offer. You'll be able to make adjustments later when you examine market rates.
For example, as a starting point, you might decide you want to earn $100,000 a year by freelancing 40 hours a week for a total of 2,080 hours worked. When you divide $100,000 by 2,080 billable hours, you'd find that this would lead to charging an approximately $48 hourly rate before accounting for your business expenses and other costs.
Read More: Going Freelance: 7 Things You Need to Know
Exploring Per-Project vs. Hourly Pricing
Understanding some common freelancing pricing strategies will come in handy since it will require you to carefully determine the number of hours you plan to work for pay; this information is crucial for later calculating your annual freelance earnings. These models include hourly and per-project pricing, and they have pros and cons.
New freelancers commonly use the hourly pricing strategy since it works well when there's some variance in how long it could take to complete a project or task. This option means the client will pay you for the actual hours worked, so there's a lower risk of underpricing and ending up with a larger amount of work than expected. For example, you might use this if you're doing consulting work, working as a freelance bookkeeper with an irregular workload or providing virtual assistant services.
Per-project pricing makes sense when you're very clear on the number of hours a task will take and you have enough experience to where there's high predictability. There's a risk you might underprice yourself when you charge a fixed price, but there's also the possibility you get the same money even if you finish faster. This can work well for project-based work like graphic design, web design, writing and web development.
Read More: How to Convert an Annual Salary Into a Per Hour Rate
Examining Industry Market Rates
With your initial calculation of an hourly rate by salary in hand, you'll need to do research to investigate the industry market rate for your type of work, location and level of experience and education. You can use a job data website such as Glassdoor or PayScale to see the typical average annual salary and hourly rate for your specific occupation. The U.S. Bureau of Labor Statistics' Occupational Outlook Handbook is another helpful resource for salaries by job title.
What makes such sites especially helpful is that you can often view salaries by experience and location to get a better understanding of suitable rates. You'll find that you can justify higher rates with the more experience and training you have as well as in places with a higher cost of living and high demand for your work. Calculators such as the one from Clockify can help you calculate an appropriate average industry rate based on location and experience too.
You can also browse websites dedicated to your specific industry such as information technology, marketing, legal services or business consulting. You'll often find annual salary surveys that provide helpful information. It also helps to look online at what other professionals who do similar work charge on their business websites as well as ask around about the going rate people are willing to pay for your freelance skillset.
Accounting for Your Business Expenses
Once you've determined a satisfying annual income goal as a freelancer and have taken a look at the typical market rate for similar work, you'll need to start looking at all the business expenses that apply to your freelance business. These expenses will need to be factored into your hourly rate so that you can charge high enough to cover them all and still meet your annual income goal. Some potential expenses for freelancers include:
- Vehicle, gas and travel costs
- Office supplies
- Home office space (utilities, rent, taxes, etc.)
- Marketing and promotional tools such as websites and advertising
- Professional development books and courses
- Technology such as tablets, phones and software
- Business and license fees
- Various forms of insurance such as business liability and health insurance
For example, if you estimate $10,000 in business expenses and want to end up with $100,000 during the year from your freelance business, then you'd need to charge a high enough rate to get $110,000 to account for the costs deducted from your earnings. Considering 2,080 hours worked as a full-time freelancer, that would lead to a freelancer rate that jumps to almost $53 an hour.
Read More: 7 Must-Have Freelance Forms
Looking at Self-Employment Taxes
Along with your business expenses, you'll need to consider the self-employment taxes you'll pay that you would only half cover as an employee. With the total self-employment tax running 15.3 percent as of publication, this means you pay an extra 7.65 percent than an employee would. The 12.4 percent portion allocated to Social Security applies to the first $142,800 earned in 2021. There's an additional 0.9 percent for the 2.9 percent Medicare portion once you make $200,000 as a single person or $250,000 for married filing jointly.
The good news is the IRS lets you deduct half the self-employment tax when figuring your federal taxes. However, you'll still want to consider the difference and adjust your freelance rates accordingly so that the extra tax doesn't harm your freelance income needs.
For example, consider the example of needing to get paid $110,000 from clients before paying your business expenses to meet a $100,000 goal. You'd pay the extra 7.65 percent part of the Social Security and Medicare taxes on the $100,000 after business expenses, and that would cost you $7,650 extra than an employee earning $100,000 would pay. Since raising your hourly rate to earn more will lead to higher self-employment taxes, it helps to use a self-employment tax calculator to experiment with the effects your freelance income and rates will have.
Read More: How to Calculate Self Employed Income Tax
Making Provisions for Time Off
Doing a basic calculation based on the desired salary for your freelance work and 2,080 hours per year works fine if you don't plan to take a vacation or need unexpected time off. However, there's a good chance you'll want at least a few weeks off a year as you'd take with a regular job. Further, having a buffer for the unexpected can help you better plan for financial issues if they arise.
All of this means that you should estimate the hours of time off you expect to need and subtract them from the 2,080 billable hours you might assume as a full-time freelancer. For example, consider that you want to take two weeks of vacation and have one week extra set aside for personal or sick days. Assuming a 40-hour billable work week, this would mean subtracting 120 hours from the 2,080 to get 1,960 hours worked. If you charged $50 an hour, that would mean $6,000 less in earnings for the year.
Since taking three weeks off results in a decrease of close to 6 percent in total work hours for the year, you'd likely want to consider raising your hourly rate accordingly to account for this. But if you don't mind working longer weeks at times, you could arrange to make up for the 120 lost hours during other weeks around the year and not need to adjust your hourly rate for that option.
Doing Your Freelance Rate Calculation
Whether you end up signing a retainer with a client with hourly pricing or decide to charge a fixed rate per project, you'll follow a similar process for calculating your minimum hourly freelancer rate:
- Start with your desired annual freelance income and planned billable hours.
- Use your research on industry freelance rates to consider factors such as experience and location and adjust your planned annual income accordingly.
- Total all your expected business expenses since you'll need to increase the money earned through freelancing to make up for them.
- Calculate the extra 7.65 percent in self-employment tax on your freelance revenue minus business expenses and adjust your needed income accordingly with the tax in mind.
- Take into account any time off you plan to take during the year since this will reduce your billable work hours unless you make up for them other weeks during the year.
- Divide your planned freelance income (accounting for expenses and taxes) by the number of billable hours you plan to work to get your hourly freelance rate.
- Use your hourly freelance rate and estimated work hours for projects to give pricing quotes to potential clients.
Besides doing all this work by hand, you can search online and find a freelance rate calculator template or interactive calculator to speed up the process. These tools will require that you have an idea of your desired earnings, expenses and total billable hours, and they usually do calculations for taxes to provide an even more specific minimum hourly rate you should charge. You can find these handy for doing simulations of different freelance work plans more quickly.
Adjusting Your Freelance Rates
After you've decided on a freelance pricing structure and specific rates, you'll find it necessary occasionally to adjust your strategy so that you get paid fairly for your work and make enough money for your living expenses and other needs.
For example, after you've gained years of experience in your trade and have established yourself to stand out more, you can justify a higher rate than someone just starting to freelance. Keeping an eye out for changes in market rates and demand for your services can help you decide when it's time to raise the rates in this situation. Further, you might need to charge more if your business expenses rise.
When raising rates, you'll want to act carefully so that you don't risk losing your clients or find it hard to attract prospective clients. Therefore, modest increases of 5 to 10 percent tend to work better than suddenly charging an extra 25 percent or higher. You can do periodic rate increases to reduce the severity or even experiment with loyalty discounts to help keep existing customers.
Read More: How to Keep Track of Self-Employed Income
- Rimuut: How To Calculate Your Freelance Hourly Rate
- Flexjobs: How (and Why) to Raise Your Freelance Rates
- Clockify: Hourly Rate Calculator
- Intuit: The Ultimate Guide To Tax Deductions for the Self-Employed
- IRS: Self-Employment Tax (Social Security and Medicare Taxes)
- CareerFoundry: Pricing 101 – How To Price Yourself As A Freelancer
- Hubspot: How to Calculate Hourly Rate for Freelance Marketers & Consultants
- TaxAct: Self-Employment Tax Calculator
- BLS: Occupational Outlook Handbook
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.