How to Calculate Your Hourly Rate As a Freelancer

Austin L. Church
February 15, 2016
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You probably didn’t get into business because you wanted to go into business. You probably made your way the way most people do: you had bills to pay, some knowledge or skills, and a desire to eat. Your probably didn't think to use a freelance rate calculator. You snooped around, tried to figure out what competitors were charging, and used "the market" to set your freelancing pricing.But if you haven’t been thriving financially, then you may need to reexamine this whole business animal. You may need to do and think different.(For help with your mindset, read about three necessary mental shifts, and this about addressing your insecurity and resolving your relationship with money.)If you’ve been following my Earn What You’re Worth series, you already have your Survival Number and Thrival Number.It’s time to buckle down on some numbers.

A Short Disclaimer on (My) Immaturity

I never enjoyed math. I preferred English. Essay tests left plenty of room for improvisation, whereas math involved lots of rote memory with very few shortcuts. I was always looking for a way to minimize my input (time spent on homework and studying) while maximizing my output (making good grades).Unfortunately, I couldn’t game math. Math class was a grind: memorize the formula, work the problem, find the answer (or not), make the grade (or not). The only C I ever made in school was in Mrs. Lackey’s Advanced Algebra class because, like a cocky idiot, I simply stopped doing my homework. Fifteen-year-old Austin needed to be smacked upside his head.Do you need to smack yourself? Pinch yourself? Get down on your knees and beg yourself?We all need to grow up and keep growing. We’ve got these residual immaturities that hobble our businesses. We can’t sprint ahead because the a juvenile little punk still dictates some of our attitudes and actions.Or maybe I’m the only one who has carry-over prejudices from grade school: “I don’t like math. So I’m not gonna." (You’re either very confused right now, or nodding your head.)Regardless, math is your friend. Math will keep you honest.Sometimes, you’ve got to be a bonafide Adult, and do the job no matter how you feel about it. Dig into some of the easy calculations below, and you can give your rates an injection of pure adrenaline.

Thriving Starts With Setting the Right Goals

A lot of freelancers and creatives have this blind optimism that does more harm than good. “Next month will be better." Why? You’re doing all of the same things you were doing. Suddenly money trees are going to sprout in your path? Doubtful.Don’t get me wrong: many of the best things that have happened to me in business have happened to me. They’re not things that I made happen, like a guy levering a stone out of a hole.A clear sense of your numbers and sales goals will enable you to go get in the way of opportunity. If you think you only need to sell $5000 worth of work any given month, you’ll start to relax after you’ve sold $6000. But if you set your sights at $12,000, and you’ll accelerate, not slow down, at the $6K mark.That’s the weird thing about the months when I set sales goals and actively monitor my progress: I tend to meet my sales goals. I make a point to track leads and follow up with prospects. I’m quicker to follow up with people. I turn around quotes and proposals faster. I stay on top of my billing, and I’m less likely to budge on pricing.In other words, I tend to be a smarter businessman.And another weird thing happens when I set a sales goal that is larger than my thriving number: I make enough money to thrive. When my sales goal was closer to my survival number, guess what? I barely make enough money to survive.Thriving starts with setting the right goals. And that’s what this math is all about.You now know your survival number.You now know your thrival number.You now know the operating expenses you need to tack on to that thrival number.You’re feeling better because that newest number, once you hit it, could be sustainable over the long-term.But we’re not finished yet.

(Take a deep breath. It’s going to be okay.)

My Freelance Rate Calculator

Step #1: Annualize your monthly goal.

Take your Thrival Number and multiply it times twelve.

[your monthly goal] x 12 = your annualized income

For example: $9000/month x 12 months = $108,000 yearly “salary."

Step #2: Factor in taxes.

Depending on which state you live in, and how much you earn, and how much your spouse or partner earns, and how you file your taxes, and a host of other factors, the amount you’ll owe for taxes will vary.Some of us pay state income tax. Some of us don't. All of us will pay federal income tax and self-employment tax and all other sorts of other taxes. This actual number is going to be different for different people. To be safe, I rounded the number at 30%.A yearly salary of $108,000 represents only 70% of what your total gross income needs to be. You will need another 30% to cover taxes, and account for that take-home income of $108K.Here’s a simple calculation to help you figure out your total gross income:

[your salary] x 100 divided by 70.

For example: $108,000 x 100 / 70 = $154,285.Now we’re getting somewhere.We’ve moved past survival to thriving. We’ve included operating expenses, and we’ve accounted for taxes. We’ve got a handle on total gross income, not net income.Set that new number aside for a moment, and let’s talk time.

Step #3: Factor in vacation time.

I doubt you’re self-employed so that you can work 52 weeks a year. So be generous to yourself. Work to live, instead of the opposite. This is about lifestyle, after all.How many weeks of vacation do you want? I want six.

52 weeks/year - [your desired number of vacation weeks] = [available weeks]

For example: 52 - 6 weeks of vacation = 46 available weeks

Step #4: Factor in your effectiveness.

You won’t bill 40 hours a week. And if you do, try doing it 46 weeks in a row. Talk about exhausted.You may work forty hours a week, but you won’t bill 40 hours a week. You’ll spend time in meetings, in the car, and on the phone. You’ll read blog posts and answer emails. You might go to a meetup or Happy Hour or conference. You’ll need to drive across town to have lunch with a client, then lunch runs long, and you work late to catch up, and you sleep late… to catch up.You won’t be able to bill all of your available working hours. A conservative billing rate would be billing 50% of your available hours: 4 billable hours per day. A more aggressive estimate would be 70% effectiveness.How many hours a week do you typically bill on average?If you’re not sure, we can keep it theoretical.

40 hours in a workweek x [effectiveness percentage as a decimal] = Effective hours each week

For example: 40 hours x .5 = 20 hours/week; 40 hours x .6 = 24 hours/week; and 40 hours x .7 = 28 hours/week.

Step #5: Calculate effective hours per year—i.e., inventory.

Based on your approximate effectiveness, you can figure out your number of effective or billable hours per week and per year.

50% Effectiveness: 46 weeks x 20 hours/week = 920 billable hours/year60% Effectiveness: 46 weeks x 24 hours/week = 1,104 billable hours/year70% Effectiveness: 46 weeks x 28 hours/week = 1,288 billable hours/year

Write down that number, and think of these available billable hours as your "inventory.” These hours are what you have to sell.

Step #6 – Calculate your base hourly rate.

Okay, so you’re beginning to see the power of this math and two numbers in particular. You’ve got your annualized income plus taxes, and you know a realistic number of billable hours per year, which took vacation time and non-effective work hours into consideration. Now do some more division.$154,285 annual salary920 billable hours/year(or) 60% effectiveness for 1,104 billable hours/yearLet’s figure out your baseline:

$154,285 / 920 = $167.7/hour.$154,285 / 1,104 = $139.75/hour.

If you have fewer effective hours, you either have to become more effective and bill more hours, or you have to raise your rates. The hourly rates above represent what you have to earn in order to fund your desired lifestyle.These numbers are the real baseline, and as I mentioned in the beginning, many of us have never seriously consider taxes, vacation (available hours), inventory (billable hours), and base hourly rates.Most of us just asked around, tried to figure out what other people were charging, and grabbed a number out of the air.

Step #7: Calculate a better freelance hourly rate.

But let’s not stop at the minimum baseline. “Minimum" starts to sound like “surviving."What if you went with a conservative effectiveness of 50%, and hourly rate of $168, increased it by 25%?

$168 x 1.25 = $210.

Or how about a stretch rate of 2x?

$168 x 2 = $336.

Now you might be thinking, “Who in their right mind would pay me $336/hour for copywriting? I can barely get them to pay $75/hour."You’re right: you may find it difficult to sell copywriting services for $336/hour. That’s why the next lesson will explore pricing and billing strategy.The rationale that I’ve outlined above will help you figure out what you have to earn. But the rationale doesn’t assume that you will bill your clients hourly. In fact, you may need to make radical changes to how you talk about your rates, how you structure your pricing, and how you communicate with clients about your pricing.For example, you may currently estimate that a certain writing project will take you five hours at $75/hour for $375. But in light of the math you just did, you should propose a flat, per-project fee of $1000 (5 hours x ~$210/hour) instead. This is where the rubber meets the road. If you really want to thrive, you must make bold adjustments.Take this freelance rate calculator seriously, and you must be prepared for your higher pricing to repel the wrong clients.There you have it.If you found value in this blog post, please sign up for my weekly newsletter. I’ll send helpful freelancing tips your way.