Start Here: How to Set Freelance Rates
So you’ve decided to take the plunge and become a freelancer. Maybe you’ve had a side hustle for a while and want to turn your passion into your career. Maybe you want more control over your schedule. Or maybe you’re figuring out your next career move and need a source of income in the interim.
Regardless of your reason for making the switch to freelance, you’ll find that one of the most challenging parts of working for yourself is determining how much to charge your clients. Having a clear financial target in mind will not only professionalize your emerging business, but will also give you peace of mind when it comes to taxes, invoices, and monthly bills.
Not sure where to start? Here’s a simple four-step process for figuring out your freelance rates.
1. Determine your annual earnings goal.
How much do you want to earn? If you’ve had full-time jobs before, your salary history can be a good starting point. Take an honest look at your budget and factor in considerations such as the cost of living in your city, your savings goals, your tax bracket, and any debt you have. If one of your motivations for freelancing is to give yourself a “raise,” factor in this amount, too.
To pick a round number, let’s say you want to earn $50,000 a year based on the considerations listed above.
2. Calculate additional personal and business expenses.
As a freelancer, you will have more personal and business expenses than at a 9-to-5 with a regular employer. When self-employed, you will be responsible for self-employment taxes (15.3% of your earnings, paid on a quarterly basis), as well as paying for your own benefits such as health insurance, retirement contributions, and sick leave.
Also consider what types of business expenses you might incur. Are you going to work in a coworking space? Do you pay hosting fees for maintaining a website? What about marketing expenses, conferences, or networking events?
Let’s say that all of these expenses equal $1,500 a month. That’s $18,000 per year, which brings your annual earnings goal to $68,000 per year ($50,000 + $18,000).
3. Figure out how many billable hours you intend to work.
One of the most appealing factors in transitioning from full-time work to freelance is the ability to work on your own schedule. But unlike a full-time job, not every hour you work will be billable. Activities such as invoicing, marketing your business, and networking or pitching new clients are considered unpaid labor. For example, if you work 40 hours a week, you might spend 10 of those hours on unpaid activities. In this case, you should divide your target weekly income by 30 rather than 40.
Continuing with our example, if you work 50 out of 52 weeks per year, you would divide your target annual income of $68,000 per year by 50 weeks and again by 30 hours per week to arrive at a target hourly rate of $45.33 ($68,000 / 50 / 30). You can use this as your benchmark number, especially if you decide to charge different rates for different types of clients (small business, nonprofit, large corporation, etc.).
4. Consider additional pay structures.
Now that you know your hourly rate, remember that you do not necessarily have to bill by the hour. You can also bill by project, which benefits both the freelancer and the client because everyone knows at the outset how much the project will be. If you know that it will take three hours to complete a project such as designing a logo or writing an article, you might bill a flat rate of $136 ($45.33 x 3 hours) or round it up to $150 and give yourself an extra boost.
Another option is to set up a monthly retainer fee for long-term clients. For example, you could charge a client $450 a month for 10 hours of social media management ($45 x 10). You might also find it beneficial to charge slightly lower fees for guaranteed long-term work because that will cut down on the amount of unpaid time you spend on pitching or marketing. For example, if $450 a month is slightly out of your client’s budget, you could charge them $400 and still achieve your earnings goal because you won’t need to hustle for a new client every month.
Striking out on your own is an exciting and rewarding experience. By understanding your financial goals in advance, you will be better prepared for mapping out your business plan, acquiring clients, and fully enjoying the work you do. Good luck!
Visit our career development page for more resources to advance your business or career.
Written by Janine Perri for Open Campus.