I've seen my fair share of freelancer and digital nomad friends & acquaintances who are too shy, too greedy or just plain-old illogical when it comes to determining their worth as a freelancer.
Whether you are using hourly rates, flat-rate pricing, or value-based pricing for your freelance services, you need to know your minimum hourly rate to calculate the total price for a particular scope of work.
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A common approach to determining the hourly rate is to decide on your salary, divide it to the number of hours worked each year:
25 hours per week × 52 weeks per year = 1,300 hours
Let's say you are aiming for a freelance income of $100.000 annually:
$100,000 / 1,300 Hours = approximately $75 per hour
The approach is pretty simple, but like all things, simple is not always the correct way, as this calculation is deadly wrong.
This miscalculation explains why we see so many thought leaders, micro-entrepreneurs and freelancers thinking they have earned six figures, but only making a 1% in profits and struggling to make it to the end of the month.
Appraising your services as a freelancer
It's not just about the money you want to make, it's about the quality of life you want to have for yourself and/or your family.
You need to worry about annual earnings (gross) and annual revenue (net) as well as a total profit you want to have while determining a freelance hourly rate. Just like a sensible business! Boring, I know, but quite essential.
First, you need to determine your overall freelance costs:
- Rent, telephone, internet, and utilities
- If you have one, Office equipment, supplies, and furniture
- Software and SaaS subscriptions
- Travel & Commute expenses
- Salary, workers comp, insurance costs
- Taxes (IRC or HMRC is looking at you!)
- Marketing cost etc.,
Now let's look at the total number of billable hours:
- How many hours are you willing to work each week?
- How many billable hours are you going to have each week? Remember, not every hour “at work” will be a billable hour.
- Any vacation time and holidays?
- Sick days?
- Will there be any business travel?
And look at your desired profit margin as a freelancer. Wage isn't exactly a profit, we tend to miss that part due to our tendency to oversimplify things. Income is what's leftover after the wage has been paid — it's the cash you can reinvest in and expand your freelance business.
How to calculate a freelance hourly rate
Using the aforementioned example of $100,000 income and a full-time 25-hour / week freelance career, let's look at how to calculate a freelance hourly rate that covers your expenses, create profit, and support the quality of life you want.
STEP 1: Estimating expenses
Add up all of your expenses: Including website hosting, technology licenses and charges, cable, telecommunications, leases, electricity, office equipment, electronics, chairs, office supplies, technical services, educational memberships, certifications, transportation, advertising and marketing expenses, legal and accounting fees, auto mileage, taxation, workers ' compensation, wages, insurance / profits, business cards, and documentation.
- Overhead expenses: $20,000
- Wage: $100,000
- Perks/insurance: $12,000
The total annual expenses: $132,000
If you're new to freelancing, you don't know what some of the expenses will be, get in touch with industry contacts and ask for planning ballpark figures.
STEP 2: Estimating the total cost of freelancing
You must also measure the profit margin that you want to see in your freelance business. A typical margin of profit for customer services is 10-20%. Let's go for a straight profit margin of 10 percent for this case.
$132,000 x 1.10= $145,200
STEP 3: Calculating the number of hours worked
As a human being, working all 52 weeks of the year is not possible, hence you won't bill 25 hours a week.
Not only will you need to take breaks, eat lunch, respond to email, take part in phone calls, attend meetings, and take care of administrative tasks, you will also need to take sick days, holidays, and vacations.
For the sake of this example, let's say the total number of "off-days" is equal to 40 days / 320 hours.
STEP 4: Calculating your hourly rate
Now that you know that your total freelancing cost is $145,200 and that the total number of hours you are going to work per year is 1,134, you can calculate your minimum hourly rate:
- $145,200 ÷ 980 = $148 per hour
As you can see in this example, the freelance hourly rate needed to achieve a $100,000 freelance income is nearly double the original $75 per hour estimation.
Other items to consider when setting the hourly rate for freelancers
It is important that you do not operate in a vacuum or isolate yourself from what is happening in your industry both locally and globally when you figure out how to price your freelance services and set an effective hourly rate.
To discover the prices your competitors demand and what other service providers charge for similar work to similar clients, you need to do some work like
- Literature Scan through publications of Industry trade organizations
- Asking other freelancer friends
- Asking potential clients or customers or people you know who have recently completed a project like the ones you want to offer
- Researching average salary information
The pricing bottom line
No one who has started a business, whether they are self-employed or run an agency, has done so to work for free, be underpaid, or be exploited for their own financial illiteracy.
To compensate for that, we've created this Hourly Rate Calculator you can use to determine your own worth and set a minimum freelance hourly rate price for yourself!
Be sure to up your freelancing game with these 5 tools, too.