How To Calculate Your Hourly Rates as a Freelancer: A Comprehensive Guide
Being a freelancer comes with several privileges, one of which is the luxury of dictating how much you earn. You are in charge of your work schedule, pay rates and finding clients that will pay for your services. As a beginner freelancer or an experienced freelancer trying to learn how to reposition yourself in order to earn more money, figuring out your freelance hourly rate is not an easy feat. Many professional freelancers still find it difficult to calculate hourly rates, so don't feel bad if you're yet to get a hand of that.
Of course, you will earn according to your skill level. Your present earning as a freelancer is directly proportional to your experience and skill level. It is very logical to think that a beginner freelancer who is a graphic designer will earn less than a professional freelancer in the same field. Chances are that the beginner freelancer spends more time working than the professional freelancer. Isn't this interesting? Hell, yeah!
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Time, they say, is money. Calculating how much you earn for time spent is therefore very important. However, it is not so easy. Choosing and planning your pay rates is a very difficult task when starting your freelance business. When your hourly rate is lowered, you get underpaid. When they are set so high, you lose out on the competition.
Therefore, you have to strike a balance while calculating and setting your hourly pay rate in such a moderate way that it ends up a win-win situation for you and your clients while keeping it clean with your competitors. Successful freelancers don't just earn to survive, they also earn to thrive. This poses a very big question: what is your time worth? How much money do you make for time and effort spent per hour? How much does this amount generate for you in a year?
These are very intricate questions you would have to answer if you want to earn more and stay on top of your game as a freelancer. In this article, we will discuss how to easily calculate your hourly rates as a freelancer. Before we do that, let's consider the reasons why knowing how to calculate your hourly rate is important.
Why Do You Need to Calculate Your Hourly Rate?
As a freelancer, there are so many reasons why you need to know how to calculate your hourly rate. Here's a list of the few important reasons.
1. Tracks Your Improvement and Earnings
Because you're just starting out, your rate may be lower than you'd like. The majority of people who engage in freelancing business earn more money per hour the longer they work in a specific industry and specialization. You can track your progress annually by understanding your hourly income and pay rate. This gives you the necessary clue required to ascertain the progress and benefits of your efforts and hard work over the years.
2. Gives You Confidence and Negotiation Power
Having a good understanding of how to calculate your hourly rate, knowing your worth and using this knowledge effectively when negotiating with clients gives you a clear sense of self worth. This gives you some negotiation power and the ability to know when to say NO, especially when you feel underpaid.
This is an excellent place to start when discussing your prices with clients. If your intention is to be successful in your freelance career, then you need to know how to price your skills and services accordingly. This will make you very confident when bidding for a project and setting your hourly rate because you already know what you are worth. In addition to determining your hourly rate, it is also critical to understand how you pay taxes as a freelancer.
This involves knowing what tax deductions and policies are available in your country to freelancers and what they should be, as well as other tax-related subjects. There's no big difference between knowing your hourly rate, and pricing with confidence while deliberating how much you want to be paid at a job interview. It is as simple as that.
3. Provides Insight On Your Annual Salary Earnings
Knowing how to calculate your hourly rate will keep you on the ready when the time for calculating your annual income comes. Of course, there are times when you will need to calculate your hourly rate from your salary income. Interestingly, this conversion can be done vice versa by following simple mathematical conventions.
As a freelancer, you will need to know how to calculate your hourly rate from your earnings. This will give you an insight on where you are on the economic scale at the moment and also provide a clue as to where you would like to be in future. All this will help you track your progress in your freelance career.
Let's assume that you earn $5 working per hour as a freelancer. That's not too bad anyway. In America's corporate society, a normal freelancer works 2,080 hours a year. Converting your hourly rate to salary means that you have to multiply the amount you earn per hour with the amount of working hours available in corporate America.
That is, $5 X 2,080 hours, which equals $10,400 a year! You can also try this approach if your hourly rate is $10, $20 or more. This can be converted to your annual salary and vice versa.
However, the rationale behind this approach is very wrong although the math makes some logical sense. This equation is not realistic. There are several other factors freelancers must consider in order to calculate their hourly rates accurately.
Remember that as a freelancer, there are times when you will have to send cold emails to your potential clients. Sometimes, you might have to walk down the street to cool off. Most importantly, you have to pay for service subscriptions, taxes and legal fees, among other things. All of these make up your expenses. You should always consider the amount of money left after you have deducted your expenses and profits.
This is the big difference between a gross number and net number. A gross number is usually realized when you sum up the total amount of money you have earned excluding expenses and your profit. Your net number, however, is the total amount left after you have deducted both the profit and business expenses. Understanding your net number is the very basic requirement needed for calculating your hourly rate as a freelancer.
Now that we have an idea of why it is important to know how to calculate freelance hourly rates. The next thing is to learn how to do the math properly. Let's get started!
How To Calculate Your Hourly Rates as a Freelancer
The first and most important step in calculating your hourly rates is being realistic and true to yourself. Remember that your first few years of freelancing may not be as lucrative as you had hoped. That should not deter you from working harder. Your consistency will eventually pay off in the long run. Just keep it in mind when calculating your ideal pay.
Knowing your worth and going for it is one thing, being realistic and logical is another. No doubt, knowing your worth is important in order for you to be able to estimate your market value. You can determine your worth by thoroughly checking your experience level and asking other experienced freelance professionals in your industry. This approach will give you a clue on how to set realistic rates in your freelance career.
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It is important to set your rates after considering what the costs you established are designed to cover. Of course, there are expenses you will not be aware of or may not have considered, and there are also times when you spend hours doing personal work that was never assigned to you by any client. This is referred to as your non-billable hours. Your billable hours, on the other hand, is the amount of time spent on work assigned by a client.
Here's how to calculate your hourly rates as a freelancer.
1. Always Consider Your Expenses First
Considering your expenses is the first step you have to take in order to accurately calculate your hourly rate. It is better to start with your expenses first so that you avoid realizing an unrealistic result after your calculations. Your business may incur expenses that might affect your financial growth if not considered during your calculation.
It is better to be aware of these expenses than to outrightly ignore them. Always consider tools you use such as your laptop, phones, software and other important expenses like subscriptions, Internet, taxes, advertising, insurance, licenses, bookkeeping, membership plans, legal payments, travel expenses, among others.
Also, ensure not to forget your own earnings. Consider your earnings as expenses too because they will be used to settle your bills. This means that if you had in mind to net an annual earning of $25,000 and the expenses accrued was $10,000, then your annual expenses would be $25,000 + $10,000 = $35,000.
Considering your earnings as expenses will keep you ahead of the game, ensure that all your money is well accounted for, and help you check if your time is worth the earning or if you could make even more? This will enable you to calculate your hourly rate with ease.
Every business needs growth and sustainability to survive. As a freelancer, you want to always improve and develop yourself so as to add more value, attract more clients and get more jobs. Money set aside for your growth, re-investment or the growth of your business is an outcome of your profit margin. This varies from one industrial sector to the other.
For instance, if you want to calculate your profit margin after deciding that you want to make 15% more from your business, all you have to do is multiply your total expenses by 15%. The result is your profit margin.
$35,000 X 0.15 = $5,250
$5,250 = Your profit margin
3. Calculate Your Billable Hours
First and foremost, I'd like to remind you that you are only human. The total billable hours per week is 40 hours. It is very unlikely that you will be working every hour each week for 52 weeks that make up 365 days in a year. That is quite unrealistic. One significant privilege of online freelance work is the flexibility it provides, especially concerning vacations, sick days, stress and burnout, public holidays and what have you. I will explain further.
The total billable hours per year = 2,080
- Sick days : 80 hours
- Vacation (usually 3 weeks) : 120 hours
- Public holidays : 80 hours
The total non-billable hours per year = 280 hours
Your actual working hours per year = 2,080 - 280 = 1,800 hours
Here, we assume that you work every week and bill clients for each project you complete. This is, however, very unlikely. There are times when you will have too many projects to handle and there are times when there's little to no job at all to handle.
Most of your time as a freelancer will be spent on finding new clients. You want to increase your clientele. You want to increase your client base. You want to be exposed and connected to more employers and more jobs. Let's assume that at least 20% of your time will be spent on doing stuff that will generate no income, otherwise called non-billable work. Check this out:
1,800 hours x 0.20 = 360 annual working hours
4. Calculate Your Hourly Rate
After establishing your actual working hours per year, which is 360 hours in this case, the next thing you need to do is divide your business expenses by your annual working hours. That is:
$35,000 ÷ 360 hours = approx. $97 per hour
You will notice that there is a big gap between the $97 we got from adding expenses and the $5 we used while excluding expenses. The first formula we used did not consider your expenses, profit margin and number of billable hours. We just assumed a number and that approach is not accurate.
Assuming random numbers as your hourly rate without actually considering several other factors that affect your business financially will not help the situation. Rather, having a concrete idea and understanding of the business expenses, building a profit margin and considering the times when you will be doing non-billable work is a great way to calculate your hourly rating and by doing so increase your earnings as a freelancer.
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