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How to determine your hourly rate
Determining the right hourly rate is the biggest challenge for any freelancer - you're always in danger of charging too little or too much, and both extremes will have a negative impact on your job prospects.
The two simplest ways to calculate your hourly rate are: a) decide how much you want to make a month, or b) see what others are charging and go with that. Here's how you can calculate your hourly rate, determine how much you should charge for your services, and avoid underpricing yourself.
If you overcharge, you may turn away clients, who'll go to other freelancers, those that offer the same quality work, but at a lower price.
If you undercharge, you won't be able to make all your hard work pay off and make a profit - once you set rates that are too low in your field, it's difficult to price up when you want to, as your existing clients get accustomed to your current low rates.
To avoid such pitfalls, here are two main ways to help you determine your hourly rates:
- Hourly rate that's enough to cover expenses
- Hourly rate that's enough reach desired salary
Calculating hourly rate based on desired salary
- Determine how much your want to earn (per month)
- Determine number of work days (per month)
- Determine number of hours of work in a day
Formula: Desired monthly salary ÷ number of work days per month ÷ number of work hours per day
Example: $10,000/month ÷ 22 days ÷ 8 hours = $56/h rate
Calculate your ideal hourly rate
The hourly rate high enough to cover your expenses
When freelancing, you should first consider the expenses and costs of your freelance business - otherwise, these figures may eat up your desired salary and most of your profit.
You'll have to consider and cover them on your own, as opposed to a traditional job where employers reimburse most of the expenses. To make sure your hourly rate is enough to cover your expenses, you should consider your general overhead expenses and your technology and software costs.
The general overhead-expenses for your freelance business
The overhead-expenses include all business expenses that are not directly associated with your labour, or the service you provide, and this includes taxes, insurance and utilities.
If the average freelancer hourly rate is $19, that amounts to $3,040 monthly salary for 20 eight-hour days per month (excluding weekends) - we'll take this figure as a freelancer's clean average salary.
In addition to that, here are the average monthly overhead-expenses you also have to consider:
- Various taxes - $400
- Healthcare - $400
- Home office rent (including coworking membership) - $350
- Purchasing equipment - $300
- Insurance - $250
- Leasing equipment - $175
- Paid vacation and sick days - $154
- Savings for retirement - $167
- Uncollected payments - $125
- Accountant fees - $83
- Office supplies - $60
- Utilities - $50
- Travel expenses - $40
- Business entertainment - $40
- Self-promotion - $35
These numbers stack up to $2,629 of overhead-expenses per month, without the software and technology costs.
Software and Technology Costs
This is a vital factor - in today's time, no one performs their freelance work without the help of certain software and technology.
Various types of freelancers will need various software - developers will need a reliable coding editor, graphic designers will need an efficient graphics editor, and translators will need a good computer-assisted software tool.
Apart from that, most freelancers will make use of time trackers (to track their exact billable hours), project management software (to collaborate with other freelancers on projects), as well as invoicing and accounting software (to bill their clients and manage their revenue).
For the necessary software, you have to make the following yearly expenses:
- Time tracking software - $20 (0$ if you use Clockify)
- Project management software - $4
- Additional, business specific software - $29
- Additional invoicing and accounting software - $30
For the necessary technology and devices, you have to make the following expenses:
- Web hosting - $30
- A reliable new laptop, after every two years - 25$ per month, if you pay $600 for a laptop every two years
- The fastest internet connection you can get - $85
- A phone with robust features (such as an iPhone) - $115
That's a total of $518 for technology and software monthly costs.
The total expenses and hourly rate
The total overhead-expenses stack up to $3,147 per month, and if you want your salary to remain a clean $3,040, you'll want to have your hourly rates reflect the $6,187 ( = $3,147+$3,040) of total operating costs.
If you're looking to calculate the overhead-expenses for your own business, here's the formula to follow, according to the mentioned book excerpt:
- You divide your Total Operating Costs per month by 4 - this'll give you your weekly overhead costs. If we take the mentioned $6,187 of total operating costs, these are the numbers: $6,187 / 4 = $1,546.75 of weekly operating costs
- Then, you divide this weekly overhead costs by 5, to get the daily operating costs: $1,546.75 / 5 = $309.35 of daily operating costs
- In the end, divide the daily operating costs by the number of billable hours you perform during one day - this may the 8 traditional working hours per day (if we consider that freelancer spend about 9 hours and 20 minutes a day, or 46 hours and 40 minutes per week working, and probably spend some of that time on non-billable activities): $309.35 / 8 billable hours per day = $39 minimum hourly rate
The $39 hourly rate represents the minimum you should charge in order to break even with your $6,187 of Total Operating Costs (which shows that the average $19/hour used for the $3,040 monthly salary in relation to these overhead-expenses, would only be enough if it were all counted as pure profit, as we counted here).
Of course, as your number of projects per month may not be enough for you to have 8 billable hours per day, you'll need to bill higher than the minimum hourly rate - according to the same book excerpt, this should ideally be $10 or $15 more. Or, you can determine the percentage of pure profit you want to make from your work, either 10%, 15% or 20%, and add it to your initial hourly rate of $39.
Of course, these are just average figures, without your target fixed annual salary, for which you'll also have to consider the total number of your billable hours per year.
The hourly rate enough to reach your target annual salary
The $39 is only enough for you to break even with your costs and expenses (and still have a salary of $3,040). But, if you want to aim higher, to reach your ideal annual figure, you'll have to consider your:
- Target annual salary
- Your number of billable hours per year
Determine your target annual salary
This number is your ideal annual salary - it'll largely depend on your needs and personal preferences.
According to a Marist Institute for Public Opinion poll, the annual salary enough to make an average American happy is $50,000.
If you want to aim higher that that, you can opt for $75,000, which, according to a Princeton University research, is the number people feel the most secure with, as they have enough money to stop worrying about the future.
Determine your number of billable hours
The estimated number of hours worked, according to the traditional figures, is 2,080 hours - this is based on the assumption that we work for 40 hours/week, for 52 weeks. But this figure doesn't include our sick days and vacation days. If we include:
- 3 weeks of vacation on average, excluding weekends (15 eight-hour days, which amounts to 120 hours of vacation per year)
- Anywhere between 6 in Tunisia and 27 in Cambodia, for national holidays. For this purpose, we'll take the 7 national holidays people have in the USA - that's 7 eight-hour days, which amounts to 56 hours per year)
- 5 days on average for sick leave, so 3 days you get per year, and 2 additional days you may take extra (5 eight-hour days, which amount to 40 hours per year)
Now, when calculating the number of hours you actually work, this is the formula:
2,080 estimated worked hours - 216 hours of time off = 1,864 of actual hours worked (if we take that freelancers bill about 8 hours per day)
Out of the reported numbers, this average of 1,864 billable hours per year is the most simplified number - every freelancer has his or her own quota of billable and non-billable hours per year, and the best practice would be to track this billable time, to get a more accurate number of billable hours.
Determine your yearly overhead-expenses
To get this number, you just have to add up all your monthly overhead expenses and multiply with 12 months - if we take the $3,147 total of overhead-expenses mentioned earlier, that amounts to $37,764 of annual expenses.
The actual calculation
To calculate your own ideal hourly rate, divide your adjusted annual salary (your desired annual salary + your costs and expenses) with your number of billable hours, and then round up this figure, to the nearest dollar.
If your desired annual salary is $50,000, this is your calculation:
$50,000 + $37,764 total overhead-expenses = $87,764
The hourly rate that reflects this total adjusted annual salary would be:
$87,764 / 1,864 = $47/hour for a desired annual salary of $50,000.
If your desired annual salary is $75,000, here's your calculation:
$75,000 + $37,764 total overhead-expenses = $112,764
The hourly rate that reflects this total adjusted annual salary would be:
$112,764 / 1,864 = $60/hour for a desired annual salary of $75,000.
Additional tips
Now that you have your starting hourly rates, here are some additional tips, to help you streamline these numbers.
Determine your actual billable hours
The average billable time per year (1,864) is good for you to test out hourly rates in your first year working as a freelancer - you'll be sure to make a profit, though you won't be able to predict the exact figures, as you'll have more or less than the average 1,864 billable hours/year in reality.
For more precision, you should make it a habit to have your own data of billable time tracked - this way, you'll be able to set the hourly rates that are more suitable for your own situation, and your own average number of billable hours.
To achieve this, you can track your billable time (and subtract your non-billable time) in Clockify, to get an accurate breakdown that shows how much you really spend on billable activities.
After some time, you'll be able to determine your own number of billable hours per year, and then divide your total adjusted annual salary with this new, personalized, and, for you, more accurate number of billable hours per year.
Raising your hourly rates
There are two main reasons for you to raise your initial hourly rate:
- Your expenses increased
- Your reputation improved
Your expenses may increase when you buy new equipment or hire associates - if this is the case, you'll need to re-calculate your overhead expenses and total operating costs, to get new hourly rates corresponding to your new expenses.
Or, if your skills and capabilities have increased, and you have finished some successful projects for influential clients, you'll be able to command higher rates, based on your improved value as a professional in your field.
A separate reason is raising your rates according to your business plan - you decide on the parameters, or time frame when you'll raise your rates, and stick to it. For example, you can decide to up your rates for 15$ after gaining 10 clients, or follow a similar routine.
Hourly rate variables
You don't have to stick to one hourly rate for all your projects and clients - different projects and clients will have different requirements, so you should charge them differently.
For example, the clients from big cities are more used to paying higher fees, so you're advised to charge them accordingly.
Also, clients who have high standards and ask for high quality, should be charged more, in relation to their higher expectations.
When adjusting your initial rates, you should also consider the worth of the project - more important projects, such as product designs done by graphic designers, should be billed more, to reflect their importance for the client.
You can also hold different hourly rates for the different services you provide - for example, if you're a designer, you'll probably want to charge your creative work the most, and the less demanding activities, such as combining parts of an already existing design, somewhat less.
Or, you can charge clients based on Tiers, and let them choose the service package that fits their needs the most. For example, you can offer:
- Tier 1 - $40 for your basic services
- Tier 2 - $50 for the basics, additional services and extra support
- Tier 3 - $60 for rush projects
You can also determine the number of revisions per Tier, so that you avoid endless project revisions with no extra compensations.
Another important variable is the retainer - if you agree with your client to receive multiple projects in the course of several months, or a year, then you should adjust your rates to reflect this agreement.
You'll be able to count on a steady flow of work and money during this time - so, the norm is that you offer this client a small discount, say 25% off your usual fees.
One other additional percentage to your fees is the markup - most professionals charge up tp 20% (though, depending on your experience and portfolio, you may charge more), for administrative expenses and your own funds you use up when working, before the client reimburses you.
Need a good time tracker that calculates your hourly rates and earnings automatically?
Clockify lets you track how much time you spend working on projects and automatically calculates your earnings based on your hourly rates.
Learn more: How to calculate billable hours | Average hourly rates | Freelance time tracking
