Going freelance is a dream for some and a nightmare to others. It comes with a unique set of pros and cons, as well as its own special challenges that you don’t have to worry about if you’re working for an employer.

One of the biggest and most important decisions that a new freelancer has to make is that of how much to charge their clients. One way to do this is to guess, but that’s also a good way to quickly go bankrupt. The alternative is to put a little work in and to run the mathematics to figure out exactly what you need to charge to make a living.

As a freelancer, you’re likely to find yourself bidding with both your hourly rate and a fixed price. The good news is that once you’ve calculated your hourly rate and started to get a feel for how long it takes you to do things, you can use your hourly rate to figure out a fixed price that’s strategic instead of based on a gut feeling. For example, if a writer hits 800 words an hour and they charge $20/hour as their hourly rate, they can divide $20 by 8 to arrive at a rate of $2.50 per 100 words.

But before you start to think about your hourly rate, you need to ask yourself a set of questions:

Questions to ask yourself

  • What percentage of your time is spent on admin and other non-paying tasks?
  • How many hours will you work per day (on average)?
  • How many days of vacation time and sick leave will you take (on average)?
  • How many days of national holiday will you take (on average)?
  • How much do you expect to spend each year on business expenses?
  • How much tax will you have to pay?
  • What’s your target annual income?
  • How much do you plan to add to your business savings account each year?

What we mean by admin/non-paid tasks

When people think about self-employment, they tend to gloss over all of the time it takes to actually run a business. The truth is that nobody ever spends 100% of their time on the jobs that bring the money in because there’s so much else to do. People think if they charge $30 per hour as a freelancer, they’ll make $30 for every hour they spend working. Unfortunately, that’s not true.

That’s why you need to be ruthless when identifying the non-paying tasks that take up your time. You’ll need a realistic estimate of how much time you’ll spend on these tasks so that you increase your rate accordingly to offset that. If you need $30/hour to live on, you’ll need to charge clients $45 so that when you’re carrying out the admin, you’re not running at a loss or forcing yourself to work unpaid overtime on your own business.

Common admin tasks include:

  • Looking for work
  • Pitching for clients
  • Breaks
  • Sending emails
  • Talking to clients
  • Record keeping
  • Marketing
  • Invoicing
  • More

On top of that, you need to consider vacation days and sick leave. If you’re ill or if you go on holiday, you stop making money. That’s why your hourly rate needs to factor in both the time you take off work and the time you spend on admin tasks. If you don’t do that, you’re going to run yourself into the ground by working eight hour days and then doing another three or four hours every evening to catch up with everything else.

A little mathematics

Once you’ve figured out your answers to the questions above, it’s time to crunch the numbers to arrive at your result. Don’t worry if you don’t have a head for numbers because you can always use an hourly paycheck calculator or even pay someone to do it for you. But one of the advantages of figuring your rate out for yourself is that you know how you ended up at the final result.

There are only three steps to this process but if you miss a step then it doesn’t work out, so bear with me here.

Step #1: Determine how many hours you work per year

There are approximately 260 weekdays each year, so take 260 and subtract it by the number of days of annual leave and the number of national holidays to figure out how many days you’ll be working. Then multiply that by the number of hours you’ll work each day to get your total for the year.

Step #2: Determine how much money you need to make

For this step, you’ll want to start out with your target annual income and then add how much you spend on business expenses and how much you want to add to your savings account. That final figure is how much you’ll need to make each year if you want to meet your financial goals.

Step #3: Determine your hourly rate

First off, we need to factor in the time you’ll spend on non-paying tasks, so take the number of hours that you’ll work in a year and multiply it by the percentage of time you spend on paid work. So if you spend 40% of your time on unpaid tasks and work 1,800 hours a year, you’d work 1,080 paid hours per year (1800 x 60%).

Next up, we take the amount of money we want to make and divide it by the number of billable hours. So if the goal is $30k, we divide 30,000 by 1,080 and arrive at $27.77 per hour. Now here’s the clever part. We take that $27.77 and round it up to $28/hour or $30/hour to make it easier for people to remember while making sure that we’re not compromising our profit margin.

A word of warning

Remember that this process will help you to determine your income before tax, so be sure to double check taxation laws in your local area. Broadly speaking, as a sole trader, your freelance income is taxed in much the same way as a salary, and the two are pretty much comparable. So if you’re not sure how much of an annual income to aim for, ask yourself what you’d be looking for in a salary.

On top of that, an hourly rate only works if you stick to it. If you start to give people discounts or if you alter the amount of time you spend on non-paying work then you’re eating into your profit margins and potentially failing to earn the amount of money that you’d like to charge – and that you’re worth.

The good news is that it’s never been easier to charge what you’re worth and there’s never been a better time to making a living as a freelancer. And now you know how to figure out how much to charge, too! Good luck.