How to Set Your Freelance Rate Without Guessing
Most people set their first freelance rate by taking their old salary, dividing by 2,000, and maybe rounding up. It feels reasonable. It is also how a lot of freelancers end up working harder than they did as employees for less money. The problem is not the arithmetic. It is everything the arithmetic leaves out. Start from what you want to keep, not from a rate Work backwards. The number that…
Freelancers often start setting their rates by taking their previous salary, dividing it by 2,000, and possibly rounding up. While this method feels reasonable, it frequently leads to overworking and lower earnings than when employed. The issue isn't the calculation; it's the factors the calculation omits. To determine the right rate, focus on your desired take-home income, not an arbitrary rate. Begin by working backward from this target.
The crucial figure is your target take-home income, the amount you want left after accounting for expenses and taxes. Aim for a specific amount, such as a salary you'd receive in a similar job. All other costs will be deductions between this amount and your freelance rate.
Several expenses reduce the difference between your target income and your rate:
1. Time spent on non-billable tasks: This includes client acquisition, proposal writing, invoicing, chasing payments, bookkeeping, and continuous skill development. Freelancers typically bill 55-70% of their working hours, meaning that out of a 40-hour week, only 24-28 hours are billable.
2. Time off: Unlike a traditional job with paid holidays and sick days, freelancers must absorb these costs themselves. A realistic estimate for working weeks is around 46, considering holidays and potential illness.
3. Employer-absorbed costs: Your previous employer covered payroll taxes, contributed to a pension, provided equipment, software licenses, insurance, and a workspace. You now need to cover these expenses independently. Estimate the annual costs for hardware, software, insurance, and a workspace.
4. Tax on profit: The remaining profit is taxed, with rates varying by country and income level, typically ranging from 25% to 40%. Consult an accountant to determine your specific tax rate.
Now, calculate your rate using the following steps:
- Determine your total working hours by multiplying the number of weeks worked by the number of days per week and the hours per day.
- Calculate your billable hours by applying your billable percentage to the total working hours.
- Estimate your annual costs, including software, hardware, insurance, and a workspace.
- Determine your tax rate and add it to your costs.
- Apply a profit buffer (10-20%) to cover fluctuations in contract work and late payments.
- Finally, divide the adjusted revenue by your billable hours to obtain your hourly rate.
The resulting rate is likely higher than the simplistic salary-divided-by-2,000 method, accounting for tax and non-billable time. This highlights the importance of avoiding this shortcut, as it ignores crucial factors.
For sanity checks, compare your effective rate by dividing the revenue needed by each hour worked, not just billable hours. If the figure seems uncomfortable, it may indicate your previous rate was too low rather than the new rate being unreasonable.
When negotiating rates with clients, quote a day rate for longer projects, as it offers a clearer anchor than a large hourly figure. When comparing freelance work to a permanent job offer, convert both to the same basis, such as hourly, using your actual hours and weeks worked to make an informed decision.
Written by urgent.news from Dev.to's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
