How to Calculate Your Freelance Hourly Rate
By Interior Savings
October 23, 2018
Here’s the $150,000 question: what is your time really worth? If you’re a freelancer and you find this question impossible to answer, you’re not alone. Right now, thousands of Canadians are working freelance contracts, trying to figure out how much they should charge for their work.
Hourly pricing. Flat-rate pricing. Value pricing. With so many options, wouldn’t it be nice if we could give you a magic equation that would ensure your success? In a perfect world, we would simply tell you to divide the salary you want by the number of hours worked each year.
40 hours/week × 52 weeks/year = 2,080 hours
75,000 salary ÷ 2,080 hours = $36 per hour
Unfortunately, it’s not that simple; and while the math behind it makes sense, the logic behind it is all wrong. For freelancers, there are many other considerations to make above and beyond billable hours. You’ll have business expenses, taxes, benefits, etc. You won’t be able to bill every hour: you’ll be pitching, networking and spending time on admin tasks too. And there’s a big difference between that gross number (your total sales before any deductions) and a net number (the amount you take home after all the adjustments have been made).
While there’s no exact science to come up with your magic number, we can outline some steps to help you get there:
Calculate your expenses
It can be easy to forget about each and every expense that your business may incur, but a quick rule of thumb is that you’d rather be safe than sorry.
When calculating your own freelance rate, things that you should be taking into consideration are: phone, laptop, internet, software, service subscriptions, tools of your trade, travel expenses, taxes, office equipment, supplies, insurance, benefits, advertising, licences, legal fees, accounting & bookkeeping services, professional memberships…. The list goes on and on…
And let’s not forget your own salary! Look at your salary as an expense too. So, if you’d like to give yourself a salary of $75,000, and your overhead expenses end up being $50,000, the total annual expenses in your business are $125,000.
Make room for growth
The numbers above are a great start. You want to pay yourself well, and cover expenses. But you’ll also want some room to grow, to re-invest in your skills, professional development and your business. Or maybe you want to build in a safety net. Funds for this come from your profit margin. Profit margins vary widely by industry.
Say you want to build in a profit margin of 20%. Simply take your expense calculation above and multiply it by 20%.
$125,000 × 1.20 = $150,000
Determine your number of billable hours
As a freelancer, it’s highly unlikely that you’ll be able to log 40 billable hours every week for 52 weeks of the year. You’re not a robot!
One of the perks about freelance work is the flexibility it provides when it comes to vacations, holidays, sick days, mental health days, you name it. Let’s break it down:
Total working hours per year: 2,080
3 weeks vacation (you deserve it!): 120 hours
Holidays: 80 hours
Sick and mental health days: 80 hours
Total hours off per year: 280
2,080 – 280 = 1,800 hours
This equation also assumes that you’ll be billing clients for every hour of work you do each week. This isn’t realistic. As a freelancer, you spend time drumming up new business through phone calls, emails, marketing, completing administrative tasks, and more. To allow for this, we suggest you assume 25% of your time will be non-billable. That said, let’s do the math:
1,800 hours × 0.75 = 1,350 billable hours per year
Establish your hourly rate
Congratulations! You’ve made it to the final step! The last thing you need to do is to divide your annual business costs by your billable hours per year.
$150,000 ÷ 1,350 = $111 per hour
As you’ve probably noticed, there’s a big difference between the $36 per hour we originally calculated and the $111 minimum hourly rate you need to run your business AND earn your desired income. The problem with the first equation was that it didn’t take expenses, profits, or downtime into account. It simply assigned you a number, and we know better than that!
At this point, your brain may be exploding with numbers, questions and possibilities. It’s a good thing that these are the things we love to do! Visit your local Interior Savings branch or call us at 1-855-220-2580 so we can help you figure out what your freelancer freedom will look like.