How to determine your hourly rate: Yearly salary method

invoice - hourly ratesAfter networking at professional gatherings, cold calling potential clients, and marketing your services to gain attention, you’ve finally landed your first client. The project is explained, you agree to a deadline, and then the dreaded question comes: “What are your rates?” Whether you’re new to freelancing or whether you’re branching into a new service area, learning how to price your services is a challenging but critical element to your business, and step one of that process is determining what you’re worth per hour.

Unfortunately, there’s no magic bullet that dictates your hourly rate, and speaking with other freelancers will only add to the confusion. Hourly rates vary considerably, and it’s easy to find freelancers who charge $30 an hour and others who charge $100 – and sometimes they’re the same person, but the hourly rate changes depending on the type of job. For instance, a wordsmith may charge $30 per for copy-editing, but $100 for media relations.

However, there’s some simple arithmetic that will help determine your base hourly rate, and then you can nudge it up or down depending the specific project you’re quoting.

Step one: What’s your expected salary?

Freelancers don’t take home a salary, but in their incredibly detailed (ha!) business plans, they more than likely have an annual revenue target that they want to hit. It may take a few years before those targets are achieved, but unless the expected annual gross revenue is unreasonable (it’s not impossible to hit six digits, though), chances are that great amounts of effort and good work will see your dream come to fruition.

But where to start? Freelancers need to determine what kind of “salary” they’ll need to pay bills and live comfortably while also keeping in mind that there will be times when work slows down, so setting a target that’s higher than a staff position is a good idea. Let’s say you set your annual income target at $50,000, which isn’t unreasonable. Many freelancers make twice that.

Step two: Billable hours

How many billable hours do you want to work per week? When answering this question, keep in mind that billable hours are different from work hours. Billable hours, as you likely know, are the number of hours you put into work for clients (read: they’re billable). Your actual work hours would include billable hours, as well as work on administration, marketing, business development, lead generation, accounting and everything else related to the operation of your business.

When deciding on billable hours, remember that your 40-hour work week will be a split between billable and non-billable hours. Focus on the billable hours and set a reasonable expectation. Setting your billable work week to 20 hours is a good start, and that will likely keep you busier than you think.

Step three: Factor in costs

As an entrepreneur, costs will be higher than working in an office environment in someone else’s employ. Freelancers have to maintain their own work space and pay for their own utilities and consumables. Estimate what your costs will be for the year and factor that into your target income.

Step four: Grab your calculator

The simple math is to break down your expected annual income to a weekly basis, so if you want to make $50,000 per year and there are 52 weeks in a year, that breaks down to a shade over $961 per week. Divide that by the number of billable hours per week. At 20 hours, that works out to about $48. Keep it simple, though, and round that up to $50.

Step five: Is it reasonable?

Education, experience, industry knowledge, skills and industry averages will all determine whether an hourly rate is, in fact, reasonable to potential clients. If you’re fresh out of college and don’t yet have a portfolio, charging $100 per hour may be an unreasonable expectation until you get a few clients and referrals under your belt. Revisit your hourly rate every year or two. Every hard worker deserves a raise, after all.

There’s no easy answer for setting your hourly rate, and even once you’ve determined your rate, there will frequently be situations that require you to either bend a little or lose the client. On the plus side, sometimes a project will come together so quickly and easily that your hourly rate will, in fact, go up.

FreshBooks Tip

To learn how to charge what you’re really worth, check out our free-to-download ebook, Breaking the Time Barrier.

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  • Katie Little

    Thanks for pointing this out.

    This is my first time being a contractor and its really good to paint out the basic information out – compared to a FT job where its all laid out for you in a company as an example.

    Great work! Love Freshbooks!

  • Chris Schaeffer

    I know you guys have a ton of data and it would be really cool if there was a way to look at industry averages for hourly rates, hours worked, company size, number of clients, ect. without showing personal information or company name. I’m thinking a big beautiful spreadsheet on Google Docs.

  • Pashmina

    Don’t forget to account for vacations, random days off, long weekends, sick days, etc. I use 48 weeks so that there’s 4 weeks worth of days of wiggle where I’m not working. With 48 weeks, it comes out to $52, which I’d round to $55.

  • David Rogers

    I agree with Pashmina: don’t forget your vacation days, weeks, etc. As freelancers, we don’t often take off all the Federal holidays (I’ve worked many a MLK and Colombus Day), but we are more prone to _just go do something_ in the middle of a random week instead. Factor that in.

    Also, remember that you won’t _always_ be working. If you’re lucky, you’ll have a steady stream of projects, but there can be dry spells, too, which can send you to the job boards again if you don’t put some away for those lean times.

    I generally expect to be at 75% capacity for the year, which has an effect on my billing rate. If I’m fully booked for the year, hooray! If not, I’ve got some to tide me over between assignments.

  • Vivian Hui

    Totally awesome list of things to consider! When coming up with my own freelance rate, I started with how many days per year I’d want to work (200) and how many billable hours per day (4) – it’s working out great so far.

  • Nick Dunin

    good simple calculation for yourself to work out what you want to bill per hour rather than go on what others are billing with results they offer for their time … good strategic view when adding all the factors relating to your business model with this calc.. good one