How to Set Your Hourly Rate

As a freelancer, there are lots of challenges and one of the earliest ones you’ll encounter is how much to charge for your time. This is a tough topic to cover because there’s no right answer. Ultimately, you should  feel good about the money you’re making relative to the effort/work you’re putting in. The balance is charging enough to be commensurate with your skill, your time, your materials while being competitive enough to get a steady income.

You’ll only know that once you’ve had a chance to do it for a while and tested different price points. That’s not entirely helpful if you’re setting your hourly rate for the first time, so below are some tips to consider.

There are several approaches and lenses through which to view your hourly rate:

• Client – Will people pay this? Is this a price reasonable for my market, for my location, for my level of experience/expertise?
• Costs – What does it cost to run your business? Will I recover all my costs and still have a reasonable profit?
• Financial Goal – How much do you want to earn in a year?
• Time Commitment – How much do you want to work?

Industry Standard

The first aspect to keep front and center in your thoughts is what price will your clients pay. Most clients will do their research and compare your hourly rate against others in your industry. If you have high credentials, a strong portfolio, testimonials, and a proven track record that all support a high hourly rate, that’s fantastic. It will be hard to get clients to sign up to a top-dollar rate if you don’t have those credentials to back it up.

To find out what the industry standard is, start by checking online on websites like Glassdoor and  Salary.com . Both websites allow you to search for job titles by your locale to see the average and spread of salary ranges. You can search by your local area and modify to match your level of experience. If you were once a full-time employee in the field you are now freelancing, you’ll also have your own salary as a data point. However, it’s good to know what the industry is paying.

Once you have this information, you can work backwards and calculate an hourly rate based on that annual salary. Generally, you can divide the annual salary by 2,000 to get dollars per hour rate. (Why 2,000? 2,000 = 40 hours per week and 50 weeks per year — assuming you get 2 weeks of vacation a year.) Once you have the hourly rate calculated based on the industry standard in your area, you now have a starting point.

Costs to Cover

Once you’ve calculated what a typical annual salary works out to as an hourly rate, don’t stop there. Salaries from an employer don’t paint a full picture of your compensation. And clients know this, so when they do their own research, they should expect your hourly rate to be more than what an annual salary works out to hourly.

As a freelancer, you keep track of your time and apply your hourly rate accordingly. If you worked 2 hours, you charge for 2 hours of work. However, the rate you set, should not only cover the work you did for those 2 hours but all your “overhead” costs as well.

Here’s a short list to consider:

• Self-Employment Tax – This includes medicare and social security taxes. The employer and employee share this responsibility 50/50. However, when you work for yourself, you are both the employer and the employee. You should factor in the extra 7.65% of gross wages you will need to pay now that you are self-employed.
• Business Operation Costs – Do you rent an office? What about marketing, accounting, legal, office supply costs? These are all expenses that all need to be covered by your consulting fee.
• Management Time – Your job doesn’t begin and end with doing the freelancing work you land. You also spend time running your business — from finances to marketing to client cultivation. The time you put into your business isn’t necessarily billable to specific clients. All the same, it needs to be covered by the revenue you’re making.
• Benefits – The typical full-time job at a company includes benefits like healthcare, retirement plan, etc. While those costs aren’t typically reflected in salary surveys, when you set your consulting rate, you need to factor that cost in.

As you think about the methods or approaches to setting your hourly rate, be sure to consider the complete picture of your business financials and what that hourly rate needs to cover.

Don’t be afraid to charge what you feel you are worth.

Financial Goal

You probably have a number in your head for how much money you’d like to make. Whatever that number is don’t forget about all the other Costs to Factor Into Your Hourly Rate. Decide on your “take home” salary — basically the money that goes into your pockets after everything and everyone else has been paid. If you start off knowing what all your costs are, you won’t find yourself at the end of the day wondering where all your money went.

One way I find to make the math easier is to think in percentages. It’s not unreasonable to assume that some of your costs will scale accordingly with your revenue.  For example, what percentage of your income might be dedicated to marketing?  The more money you put into marketing, the more clients you get and the more revenue you make. Specific dollar amounts might be harder to nail than a general percentage.

So, let’s look at a concrete example of how this might work. I like to work backwards from that number in my head.  Let’s say you want to have in your bank $100,000 at the end of the year. Let’s now make some percentage assumptions for all your costs:

• Taxes – 30% of your Total Income
• Office – 5%
• Business – 10%
• Marketing – 10%
• Other Costs – 5%

60% of your Total Income will get spent paying on costs necessary to run your business. In other words, only 40% of your Total Income will actually go into your pockets at the end of the day.

In math terms:  Take Home = .40 * Total Income

If you’ve said to yourself you want a $100,000 Take Home, that formula works out to this:

$100,000 = .40 * Total Income

Total Income = $250,000

What does that work out to in terms of an hourly rate?  By the same token above, divide by 2,000 (the number of hours you’ll be working). In this case, that works out to $125/hour.

How Much Do you Want to Work

One of the reasons you are freelancing may be to work less than full-time but still feel financially stable. Arguably some of the best advantages of freelancing are working from home and setting your own hours. That includes how much you actually want to work.

In the above example, we assumed you’d be working 2,000 hours a year (equal to 40 hours a week for 50 weeks).  Let’s say you have kids and you want to work when they are in school and you don’t want to work when they are out. If the typical school year is 36 weeks and you work a 40-hr week, that comes out to 1,440 hours a year. Taking the same financial goal as above — $250,000 Total Income — you would need to set your hourly rate at $174/hour ($250,000/1,440).

Putting it All Together

Now it’s a balancing game. After looking at the different ways to approach setting your hourly rate, you need to decide for yourself how to balance all of these things:

• Will your clients pay this rate?
• What are all the other costs your rate needs to cover?
• Are you able to meet your financial goals?
• How many hours will you need to work?

Some of the questions above are within your control (e.g. financial goals) and some are unknowns (e.g. what a client is willing to pay). Having gone through the exercise above, hopefully you have a range to work within that will give you a starting point. Then just put yourself out there! If you are easily landing clients, try increasing your rate for your next gig and see if that’s still the case.

If you are struggling to land clients and you feel everything else about your pitch is solid, then try offering special (time-limited discounts) rates to see if it makes a difference. The beauty of offering a special is you don’t have to worry about setting a lower rate in stone but can still allow you to test your rate structure. And of course, who doesn’t love a deal.

Don’t forget; every year you work as a freelancer is another year of experience that adds to your credentials. Just because you set a rate for yourself now doesn’t mean it’s a rate you have to stick to.

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DISCLAIMER: The information and advice I offer on this site are from my own experience, understanding and independent research. I don’t receive commissions, affiliate money or any form of incentive for suggesting the services, tools, products that may be mentioned. I encourage you to do your own research, form your own opinions and practice your own strategies. Please share what works with the community.