Why You May Be Going Broke as a Freelancer and You Don’t Know it Yet

Question: when should you raise your freelancer rate? Answer: now.

Ok, let’s get a little more specific. Most of the freelancers we talk to always have a problem knowing when to raise their rates, and inevitably it means that they have been dragging their feet on doing so for months or perhaps years. Nine times out of ten, we see freelancers undercharging and a big part of this is because the numbers lie.

Here’s a recent article from Time celebrating how “lucrative” it is to be a freelancer today:

Thinking about freelancing? Turns out, it pays great. Freelancers in the U.S. make an average of $31 an hour, which comes out to 17% more than the typical full-time employed worker, according to a survey from Payoneer…. In the U.S., the average freelance rate outpaces a traditional 9 to 5 by a long shot. As of October 2017, median weekly earnings for full time U.S. workers was just shy of $45,000 a year, according to Bureau of Labor Statistics data. For freelancers, $31 an hour works out to about $64,000.

Raise your hand if you immediately see the error the author of this article is making. If you’re a freelancer, it’s obvious: she isn’t taking into account everything freelancers pay out-of-pocket.

The author extrapolates this $31/hour freelancer average rate to a salary of $64,000 a year and compares it to the average 9-to-5 salary of $45,000 a year. Let’s leave aside the fact that she’s most likely comparing pre-tax freelance dollars to after-tax salary dollars (because pre-tax 9-to-5 salary is closer to $67,565), which means freelancers are already making less overall. But even without that, what about health insurance? Retirement contributions? Paid time off? Office equipment? Heck, coffee? A freelancer has to pay for everything from his/her hourly rate. 9-to-5 employees usually have some perks and benefits in addition to their salary.

It’s insane how this Time article tries to spin things. More than that, it’s highly irresponsible journalism, if you can even call it that.

Freelancers are chronically underpaid because they settle for it.

So doing the math properly, we see that $31/hour is not close to being advantageous compared to full-time workers. This is because raising rates is difficult, if not downright scary. Remember, if a 9-to-5 employee asks for a raise, usually the worst that happens is getting a “no.” When freelancers do it, they can risk losing their clients altogether. So it’s easy to see why freelancers put off increasing their rates until it becomes severely limiting. That’s why the time to raise your rate is probably right now.

But it’s hard to overcome that fear of losing clients to cheaper competition which is the main factor that discourages freelancers from doing what they know they need to do. In many fields, it almost seems like a race to the bottom: no one wants to charge this little, but if you don’t, you won’t have any work. So if a freelancer wants to earn more but is unwilling to raise rates, the only option left is the one most take: work more hours. This is why reports say that full-time freelancers work more hours per week than full-time salaried employees.

This is the “easy” way out. It’s easier to work a few more hours than to have that painful conversation with clients about raising rates. But freelancers can only expand so much horizontally; there are only so many hours in the day to work. Eventually, freelancers have to expand vertically, by raising their rates, in order to realistically increase their take-home salary. So how can they do that?

Doing the tough work of raising rates.

Honestly, the how of raising rates isn’t difficult. You just start charging more. But it’s actually doing it that’s the hard part. There are many ways to go about it (and a million articles on how to do it), but it’s mostly about overcoming the fear and discomfort of asking. If you have all the confidence in the world, you probably have done it by now. For the rest of us, let’s approach this in the easiest way possible:

1. Raise your rates for new clients. Avoid that difficult conversation altogether with your current clients. Just start charging more for any new ones. This is the ideal and easiest path, and the one we most recommend for freelancers who would rather work more hours than ask clients for a raise. Yes, it can be difficult if the new clients are direct referrals from current clients at a certain rate, but just keep this phrase in your back-pocket if they ask: “Yes, ________ are at a legacy rate, but my range has changed since then.”
2. Move your goal posts. If you aren’t in the habit of offering a range of rates when you first negotiate with a client, do so. Instead of saying your rate is X/hour, say it ranges from X/hour to Y/hour. It’s generally good practice to do so anyway to maximize what you can negotiate, but having a range makes it easier to change your rates as well. Tack on five bucks on either end and you’ll have new clients in a higher bracket with ease.
3. If you have to raise your rates with current clients, come armed with almost too much ammunition. Fighting inertia is tough, and it’s important you have a strong case to present. Ammunition can include:
   1. Expanded scope of the work you have taken on.
   2. Years have gone by without a rate increase.
   3. They are the one of the only clients you have left at this lower rate.
   4. The cost of the tools you need to use have increased.

On that third option, it’s always best if you are fairly sure that your contribution to that client would be hard to replace. If it’s no issue to swap you out with some other freelancer, it’s probably best to think of them as “legacy clients” and keep their rate where it’s at. At this point, you need to either phase them out once your other clients are at higher rates, or wait until you have the proper amount of ammunition.

Don’t let bad math on Time.com fool you. If you freelance, you probably need to charge a lot more per hour just to keep up with 9-to-5 employees. Think hard about where you want to be and take the steps today to raise your hourly rates.