How to calculate what your time is worth: Part 1
As of the latest research from 2016, freelancers make up as much as 35% of the workforce, adding roughly $1 trillion (yes, trillion) to the U.S. economy. Why, then, is being paid a fair rate the top challenge that freelancers face? The answer is simple: they don’t know what their time is worth, so they don’t charge accordingly. We’re here to help.
This guide will show you how to determine what your time is worth, so you can charge accordingly.
The average hourly rate for freelancers, and why this matters
According to a 2015 survey done by Payoneer, the average freelancer earned $21 an hour, working 36 hours a week. This puts their salary at $39,000, before taxes.
At first glance that might seem like a great deal: earning a significantly higher wage than most people in entry-level corporate jobs while working, on average, 4 hours less per week. But if you calculate all of the new expenses you have as a freelancer, the taxes you owe to the IRS, and putting money into your personal account (you’ve got rent due, after all), $21 an hour might not cut it. If you factor in the cost of living comfortably in any major U.S. city — between $40,000 and $110,000 — it becomes evident that you need to earn more.
How to calculate what your time is worth as a freelancer
Figuring out your hourly rate is the first step to charging what you need to thrive as a freelancer, instead of merely survive. If you wanted to do that, you might as well head back to your cubicle. But you don’t want that, right? Right! Here are the four steps to take to figure out your hourly rate.
Step 1: Decide how much freelance income you want to earn annually.
Let’s say you want to earn $100,000 freelancing over the next 12 months. You’ll use this as your starting point for calculating your hourly rate.
The reason we advise using your income goal, instead of how much you earned last year, is because ideally, you’ll increase your income every year. Starting with your ideal income allows you to calculate an hourly rate that will help you achieve that goal.
What is your annual income goal? _____________________
Step 2: Calculate your cost of doing business.
Step 1 was the easy part. Here’s where things get a bit more complex. In order to calculate your total cost of doing business, you’ll need to add up the amounts you pay annually for business expenses. Let's look at some example expenses for a freelance designer (you'll want to add up the expenses that are relevant for your specific job):
- Cell phone — $100/mo.
- Internet — $80/mo.
- Project management tools — $20/mo.
- Invoicing and accounting software — $40/mo.
- Web hosting — $25/mo
- Office space or co-working membership — $500/mo.
- Accountant fees — $250/mo.
- Health insurance — $100/mo.
- Upgraded computer/software — $1,000/ year
- Self-employment tax (state and federal) — $26,000, based on a total rate of 26%/ year
Once you have all of your expenses calculated, it’s time to crunch some numbers.
First, add up the total cost of all your monthly expenses and multiply that number by 12. The total example monthly expenses x 12 months = $13,380.
Next, add in your annual expenses. Using the above example costs, this would look like: $1,000 for upgraded computers and software + $26,000 estimated self-employment taxes + $15,780 for the monthly business expenses = $40,380.
That number, $40,380, is the annual cost of doing business. Use your actual costs to determine your cost of doing business each year.
What is your annual cost of doing business? _____________________
Step 3: Determine your adjusted annual salary.
Now that you have your annual income goal and your annual cost of doing business, you can calculate your adjusted annual salary.
Annual income goal: $100,000 + Annual cost of doing business: $40,380 + $140,380
What is your adjusted annual salary? _____________________
Step 4: Calculate your billable hours per year.
This can be tricky if you aren’t in the habit of tracking every hour you spend working. Most people aren’t, so don’t worry! You can use estimates for this or, better yet, decide how much time you want to spend working and how much time you’d rather spend at the beach.
Here’s an example, based on the average number (36) that freelancers work each week:
You work 7 hours a day, 5 days a week. That’s roughly 36 hours. Multiplied by 52 weeks in a year, you have 1,872 working hours, annually.
You take a total of 30 working days off per year (weekends and holidays don’t count). That’s 210 non-billable hours.
You don’t work on some major U.S. holidays, let’s say 8. That’s eight 7 hour days that you don’t work, adding up to 56 non-billable hours.
Total hours off per year: 266
Total working hours per year: 1,872
It’s likely that not all of your working hours are billable hours (when you’re doing work that makes you money). Some of your time is spent pitching new clients, updating your portfolio, and performing other administrative tasks. Let’s estimate that you spend 20% of your time doing work that is non-billable.
1,872 x .80 = 1,498 hours (rounded up)
That leaves you with 1,498 billable hours each year. Now you need to subtract your non-billable time.
How many billable hours do you have each year? _____________________
Step 5: Calculate your hourly rate.
After calculating all of the above you should have your annual billable hours and your adjusted annual income. Dividing these two numbers will allow you to calculate your hourly rate.
(Adjusted annual income) / (annual billable hours) = hourly rate
Using the examples above, that would look like:
$140,380 / 1,498 = $94/hour
Voila! Your hourly rate. Depending on where you’re at in your freelance career, this number may seem high. It’s just an example, though. Plug in your own numbers to determine what your hourly rate is.
What is your hourly rate? _____________________
Now that you know your hourly rate, what’s next?
Figuring out what your time is worth goes deeper than just knowing your hourly rate is, but it’s an important first step. Check out How to Calculate What Your Time is Worth: Part 2 for a primer on how to use your hourly rate to calculate project fees, and whether you should charge by the hour or by the project.