Author: Jason Finnerty

Freelancing Isn’t Free

To make a living as a freelancer, you need to be paid for the work you do.  Setting your rates is an important but difficult decision for many creatives entering the market; you don’t want to undercharge but you don’t want to miss any opportunities because your rates are too high. Knowing what you need is the first step in determining what your rates should be.

When I made the decision to go full-time freelance, I looked at my expenses from the previous year to see how much I would need to maintain my lifestyle. Once I had an annual amount, I broke that down into a monthly and daily increments. This allows me to review my earning each day. If I didn’t hit my daily target, I know that tomorrow will need to be more productive.

Estimating Expenses and Hours

Many freelancers use the following basic formula as a starting point for setting rates:

(Annual expenses + savings) ÷ billable hours = expected minimum hourly rate

For example, if you need to cover $25,000 in expenses, want to save $5,000, and expect to bill 1,000 hours, your rate should be $30 per hour.

Here are some tips for estimating how your variables plug into this equation:

Annual Expenses:

Take a look at what you spent last year, but keep a close eye on your expenses on a weekly/monthly basis or else you’re likely to have a nasty surprise at the end of the year. Expect your expenses to change from your pre-freelance days, as there are some things you might not have to pay for now that you’re working from home, such as transportation, parking, lunch/coffee break treats, etc. But you’re probably going to pick up a few new expenses, like software, communications, office supplies (stealing from work is no longer an option…), motivational treats, gym memberships to burn off the motivational treats, etc.

Now that you’re self-employed, there’s no employer deducting the proper amount from each paycheck. True, being self-employed allows you to enjoy more tax savings through allowable write-offs, but for US and Canadian freelancers, expect to give at least a third of whatever you collect back to your government. Make sure to account for your taxes in your annual expenses. Depending on where you’re working, you might also have to collect taxes on the services you’re providing. The taxes I collect go straight to a specific bank account, and I don’t touch them until it’s time to remit them to the revenue agency.

Savings:

Choosing to become self-employed means losing some of the financial benefits general employees often take for granted, such as corporate pensions, medical insurance, sick days, and benefit plans. Whether it’s a 401(k) or another kind of retirement fund, it’s critical that you invest your profits so that you can enjoy something better than cat food during your retirement years. Build a specific amount into your formula to ensure you’re putting money aside every year, and then don’t touch it until after you retire. The higher your expenses, the more you should be allocating to your savings.

Billable Hours:

If you work 40 hours per week and take two weeks off per year, you’re looking at about 2,000 hours per year. Do not think you will be able to bill for every hour you work. It’s not going to happen. You’re going to invest time in emails, phone calls, meetings, prospecting, accounting, administration, and more. Your clients are hiring freelancers so that they don’t have to pay an employee 2-3 hours per day to hang out at the water cooler.

This is an opportunity for you to improve your accounting skills – track your time on a daily basis in terms of billable and non-billable hours. In your first year, or first few years, you’re going to probably spend much more time on the non-billable hours. As you progress in your freelance career this will probably change, but if you aren’t tracking it, you won’t really know. A reasonable range to target for your first few years might be 750-1,000 billable hours.

Adjusting your price

Since you’re running your own business, you can set your rates to whatever you like.  If you’re finding that you don’t have enough work, you might choose to drop your hourly rate a bit, and make up for the difference through additional billable hours. More work should be more pay, and you’re going to need to experiment a bit to find out what the market will bear. A good rule of thumb, if 30% of your clients aren’t questioning your price, you’re probably not charging enough.

Be realistic about your expenses, billable hours, and savings. These three factors can make the difference between a successful freelance career and one that involves too many ketchup sandwiches and ramen noodles. Once you know how much you need to make for each billable hour, you can start looking for projects that will pay you the rate you’re expecting.