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When I became a self-employed accountant, I quickly realised that working out my hourly rate was going to take more than just charging the same as my competitors. Or just simply accepting what clients were willing to pay me.
I had to consider my taxes, travel and things I had to pay for to deliver client work (including some very expensive software subscriptions).
Despite my background with numbers, I still faced with one of my first and biggest business challenges.
How to price my services fairly (for me and my clients) and competitively.
On one hand, I knew I would have to pay for expenses just to be self-employed but on the other, I was being overwhelmed by freelancer sites stuffed with low priced competitors** and clients trying to convince me to drop my pricing.
** I use the word “competitor” very loosely. There are many people on freelancer sites charging rock bottom prices but their circumstances are very different, the quality of their work varies and the type of client shopping on these sites make their buying decisions purely based on price.
I quickly realised I needed to think like a small business owner and work out what I was worth as well as what I needed to earn as a bare minimum just to cover my costs and pay myself a reasonable salary.
But before we start here are a few truth bombs:
- Clients always want things cheaper, especially once they realise you are a freelancer;
- People will try to take advantage of you with the promise of more work;
- Some clients will never be happy;
- Going in cheap not only devalues your services but everyone else in your industry.
You need to remember this because once you calculate your hourly rate and start sticking to it, there is always going to potential clients who baulk when they hear your price.
Don’t take it personally or let it get to you. Just move on and find the right clients for you.
The Wrong Way to Work Out Your Hourly Rate
When you go self-employed it’s down to you to cover the costs of being in business as well as taxes and pensions.
A common mistake I see when it comes to working out an hourly rate is to take the salary you want to earn and divide it by the number of hours you plan to work.
So if you plan to work full time then the total number of hours you’ll work would be 2,080 hours per year (40 hours per week multiplied by 52 weeks).
That means your hourly rate would be £19 per hour (£40,000 divided by 2,080 hours).
Sounds simple right?
But this is completely wrong and could leave you short when it comes to paying your bills.
This is where you need to start thinking like a business owner.
How to Calculate Your Hourly Rate
As a business owner, you have costs to pay for.
We don’t have the luxury of an employer to buy us a laptop or pay our phone bill!
So when it comes to working out your hourly rate you need to make sure you are going to be paid enough to cover your costs AND pay you a reasonable salary.
Follow these steps to work out your self-employed hourly rate, or at least the bare minimum you need to charge to breakeven.
Step 1: Calculate Your Take Home Pay
This is the amount of money you bring home and use to pay all your personal bills. If you aren’t sure what that is, then add up all your living costs.
That’s things like:
- Car payments
- Going out
For the purposes of this example, let’s say that’s £30,000 a year.
Step 2: Calculate Your Business Expenses
Total up all your business expenses.
Those are all the things you need to pay for to be self-employed like:
- Website and hosting
- Office supplies
- Professional memberships
- Training courses
- Accounting and bookkeeping fees
- Legal advice
- Bank charges
Let’s say that comes to £15,000 per year.
Step 3: Calculate your true cost of being in business
This is the total of steps 1 and 2. That’s your desired salary plus the cost of being in business.
In our example that is £45,000 (£30,000 plus £15,000)
Step 4: Calculate Your Billable Hours
When you work for yourself and charge an hourly rate the amount you can earn is capped by the number of hours you can physically work a week and charge for.
There is also an element of non-chargeable time when you are self-employed because you’ll have to spend some time dealing with business admin, like invoicing or bookkeeping.
On top of this, you’ll also need to take time off during the year for holidays, public holidays and sick leave.
If you are employed, you’ll probably still get paid even with all this time off. But when you are charging an hourly rate, if you don’t work you won’t earn.
That means the rate you set needs to take this time off into account, much like if you were employed, so you maintain a consistent salary.
Of course, this can be hard to predict but you could work out your billable hours by making some reasonable assumptions:
- Holiday: 25 days
- Public and Bank holidays: 8 days
- Sick days: 8 days
- Weekends: 104 days
In this example that would be a total of 145 days that you can comfortably predict you probably won’t be working during a year, meaning billable days when you are at work of 220 days (365 days per year minus 145 days)
Next, you need to estimate how many hours during a working day you can reasonably work. If you work full-time that could be up to 8 hours a day, but if you have other commitments that may be less.
Don’t forget you’ll need to spend a little time each week handling business admin and you’ll want to stop for lunch!
Let’s say after taking everything into account that’s 7 hours per day.
Your billable hours per year are therefore 1,540 (220 days at work multiplied by 7 hours per day).
Compare this to our earlier example where I showed you that 40 hours multiplied by 52 weeks makes 2,080 hours. As you can see that simple calculation is fundamentally flawed!
Step 5: Calculate Your Hourly Rate
Now you have all the information you can calculate your hourly rate based on the number of hours you work and the costs you need to cover.
You’ll need to divide your total costs (result in step 3) by your billable hours (result in step 5).
Using the numbers calculated in this example that means your hourly rate is worked out as £29.22 (£45,000 divided by 1,540 hours).
Do I Charge Tax as a Freelancer?
When you are a freelancer taxes are your responsibility. Your clients are not responsible for working out your taxes or covering them (as if you were employed).
You’ll need to invoice your client with just charge the agreed fee.
Then, once a year you’ll then need to add up all your business income and expenses so you can work out how much you need to pay.
You do this on a self-assessment tax return and it is due by 31 January each year.
Taxes can often come as quite a surprise, that’s why it is important to include some kind of estimate for this cost when you work out your self-employed hourly rate.
Self-Employed Hourly Rate Calculator
To make things easier for you here is my hourly rate calculate spreadsheet which you can use as a template. It will automatically include an estimate for your taxes too.
How to Use my Self-Employed Hourly Rate Calculator
On the dashboard enter the following information:
- Desired Monthly Take Home Pay
- Working Hours Per Day
- Sick Days Each Year
- Holiday Days Per Year
- Bank Holiday days each year
On the Business Budget tab enter your estimated annual business costs. I’ve listed out the various headings including one called “Business re-investment”.
Business re-investment means the money you earn that doesn’t go towards your salary, taxes or expenses but instead is put towards activities to grow your business. That could be training for new skills, advertising for more work or a new website.
Sometimes you have to spend money to make money. So if you have plans for the future that will cost extra money, then you could start saving towards those straight away but adding it into your ongoing costs.
The self-employed hourly rate calculator will work out the bare minimum you need to charge your clients and that figure is on the dashboard tab.
Things to Consider Once You Have Worked Out Your Hourly Rate
Understanding your numbers is fundamental to being successfully self-employed but when you run a business sometimes things are more than just about numbers on a page.
Once you have your hourly rate consider the following:
Check how much your competitors charge
Every market has a ‘going rate’. That means the price that your potential clients expect to pay.
Check your hourly rate against this figure. If it’s too low you could be missing out on extra money. Too high and you could be pricing yourself out of the market, or you need to market yourself as having extra skills and experience beyond the competition.
Do You Need to Charge a Minimum Charge?
Depending on the nature of your work you may need to travel around to clients premises. When you are self-employed you are generally only paid for the number of hours you actually to work not your travel time.
If you happen to find a client that is difficult to get to and requires, say, a 3 hour round trip to get to their premises then you will lose 3 hours chargeable time in your working day.
If the client only requires one hour of time from you then the cost of your travel time will be more than what you will be paid.
You may need to set a minimum number of hours to deal with travel time or you may need to decline particular opportunities.
Does Your Hourly Rate Reflect Your Value?
If you have more experience or have additional qualifications or skill then you may be able to charge more than the market rate.
One of the worst things that could happen is to take on work at a low rate that makes you feel devalued.
The figure you get from the self-employed hourly rate calculator should be treated as a starting point. Ultimately you may be able to charge more, so you don’t miss out on any opportunity to earn more money.
Should You Charge An Hourly Rate?
Depending on the industry that you work in, fixed-price arrangements may be more commonplace.
Fixed price means you charge a flat rate for carrying out a piece of work rather than charging by the hour. Customers often prefer it because they know exactly what they are going to pay.
Setting a fixed price can be tricky, especially if you are new to freelancing. But knowing your hourly rate will at the very least give you a starting point for valuing your time and give you confidence that what you earn will be enough to cover your costs.
Working out your hourly rate is probably going to be one of the first business lessons you are going to learn.
And whilst us Brits can be a bit uptight when it comes to discussing money, having a figure you know is right for you will help you feel more confident when it comes to quoting a price.
My self-employed hourly rate calculator will hopefully get you started with setting your price. But remember that this is actually the bare minimum you need to charge to be in business and pay yourself the salary you need. Sense checking the hourly rate figure may mean you can actually charge more money!