The Freelance Hourly Rate Formula
As a freelancer, one question you are GUARANTEED to be asked on the regular by potential clients during all of those client consultation discovery calls is, "What's your hourly rate?" It's a good idea to set your hourly rate early in your freelance journey (and you'll raise it periodically, so don't worry... you're not stuck with it!) since it's an obvious starting point for your pricing, especially early on.
Billable hours vs. Non-billable hours
What the term 'billable' means is that it's time spent on activities that drive revenue – so examples of billable activities include heads-down work on a project, time spent researching for that project, the time you take to read and answer that client's emails related to the project, phone calls or Zoom meetings with the client after they sign your client agreement and so forth and so on.
They're all examples of activities that you can, and should, be billing to your client in one way or another – whether that's via your hourly rate or you've included estimates for that time in your flat rate pricing. (If you're looking for help with your pricing model, check out this post about five different freelance pricing models you can use with your clients!) https://www.thefulfilledfreelancer.com/post/5-types-of-pricing-freelancers-can-offer-their-clients
It should go without saying but let's get loud for the people in the back – because you are a freelance business owner, you will spend PLENTY of time on your business doing all of the fun stuff like sales outreach, contracts/legal, bookkeeping and accounting, taxes, organizing your own systems, working on your marketing and tons of other stuff that no one ever talks about but is all just part of the "running a business" starter pack.
None of that is billable (since it's for the benefit of your own business) but you still need to do it. And you're going to want to make sure you get it done during your normal work week so that you don't turn into a crazy burnout-prone workaholic who is stuck working on their business when they should be relaxing, spending time with family, and doing all the self care.
So you have to make sure you 'budget' your working time to include all of that stuff in order to stop the spillover into your personal life. That means we still have to account for that time so you're not trying to create time where it doesn't (or shouldn't) exist by borrowing from your personal time.
Anyway, you will see some questions about how much time you will spend on billable client work (on average) per month in the calculator below. Be honest and, yes, underestimate how much time you can and will dedicate to client work that will drive revenue.
Vacation time and your freelance business
We've all seen "screw the nine-to-five, I'm sipping piña coladas by the pool in Chiang Mai because I'm a FREELANCER" Instagram posts. Here's the hard truth about vacation time and sick days as a freelancer though – you either ain't gettin' paid for that time -or- you have to squeeze that work in before or after your vacation if you want to maintain the same level of income.
That's not to say there isn't flexibility in freelancing because there totally is! When I go on vacation, I plan well in advance for that week "off the grid" and make sure I've notified my current clients and handled all of their project and retainer needs beforehand so that I can enjoy the hell out of that piña colada, knowing that my shit is handled.
My point in bringing up vacation time when it comes to your hourly rate is that you don't get paid time off as a freelancer so you need to think about your time a little differently and know that if you're sick, your kids are sick, your pet gila monster is sick, or you just need a mental health piña colada by the pool, you can do it but you can't bill for that time. So make sure you calculate your target annual income (it's factored into the calculator below, don't worry!) with some time built in for sick days and vacation time needs.
Desired annual income
When we talk about your desired annual income, I want to be clear that this is a starting point. It's a goal number that allows you to visualize, and work towards, hitting that annual income number. Many freelancers who move from a traditional job want to know how much they can make in a year as a freelancer – the target annual income number is a way to estimate all of the variables that go into hitting that desired annual income goal. It's not a guarantee by any means and it's entirely up to you and how you approach building and growing your freelance business.
Variables you should factor into your hourly rate for freelance services
Let's talk about the five variables that you should factor into setting your hourly rate as a freelancer. There are no rules to setting your hourly rate but there ARE elements that you can consider and, of course, communicate to your client as to why your hourly rate is what it is. These variables are somewhat subjective so you need to be honest with yourself when you are trying to quantify each one and make your best guess as to how it should impact your overall hourly rate.
Your expertise, experience level, and skills
I'm going to lump all of these into one variable but it's up to you to determine how much your subject matter expertise, your relevant years of experience, and both your soft skills (emotional) and hard skills (technical) should come into play in coming up with your overall hourly rate.
I like to think of this variable as your 'pay grade' much the same as an annual salary is based on. Junior-level employees are just getting started in their chosen discipline and won't have the same level of technical or soft skills that more experienced employees have and the same goes for freelancers and their experience level. Your clients will expect that your rate reflects your experience level encompassing your actual technical proficiency (as a designer, social media manager, copywriter, whatever) as well as your business acumen and professional expertise.
This is a really touchy subject for a lot of people and the key to assessing your competition as it relates to your own rates is to make sure – make ABSOLUTELY SURE – you are comparing apples to apples. So find some freelancers in your country, and ideally, your region, with a comparable set of skills and experience (see previous point) and take a look at their pricing to see how yours compares.
Be super duper objective in how you compare your portfolios and your 'profiles' as a freelancer. When I say profile, I'm not talking about your Upwork or Fiverr profile – I'm talking about who you are as a freelance professional. How do your creative/technical skills compare? What about your prior work? Do they have relevant professional experience listed on their Linkedin page?
And remember, market rate is just a single data point in your research so if you feel that your peers are underpriced, you don't have to follow suit – you SHOULDN'T follow suit!
The next variable to consider in setting your hourly rate is taxes. Yay, Uncle Sam! Now I'm speaking primarily to U.S.-based freelancers (because that's where my own expertise lies) so you should consider your own country and/or city's taxes but most tax and accounting experts, of which I am not so this is not legal or professional advice, estimate 30% as an effective tax rate for U.S.-based freelancers. That means for every dollar your client pays you, you should be setting aside thirty cents to cover your tax liability.
Again, this is heavily contingent upon your locale, even if you are in the United States as states and cities all have varying tax rates and those tax rates will depend on whether you're a sole proprietor, registered as an LLC, or registered as an LLC but filing as an s-corporation. Always, always consult a tax professional to help you plan.
For what it's worth, I plan for a 30% tax liability and have always ended up owing less but I'm okay with having a little extra left over in my favorite free business bank account (https://www.thefulfilledfreelancer.com/post/free-business-checking-accounts-alternatives-to-azlo-r-i-p) come tax time rather than having to scramble to come up with that tax payment. That 30% covers your business taxes and your income tax – just like you'd pay if you you were bringing home an annual salary from a traditional 9-5 W-2 job.
So to bring this full circle: when you set the hourly rate you'll charge your clients, you'll want to make sure you factor in that 30% you'll owe in taxes. That way, your profit margin will reflect a net 'take home' income that's free and clear.
In the same vein as taxes, you'll also need to factor in whatever other expenses you might have as a freelance business owner. For most of us, those are minimal. My own expenses for marketing/sales expenses, professional memberships, travel expenses, software subscriptions, office equipment, business insurance, etc. are pretty minimal.
BUT the one line item that does add up pretty quickly is the credit card processing fee that I'm charged every time my client chooses to pay an invoice by credit card. It's a 3% processing fee by Stripe (the credit card processing company) even though I usually invoice my clients from my accounting platform, Wave, and that credit card processing fee is pretty much industry standard no matter what platform you use to send an invoice.
So my suggestion is that you keep that 3% in mind and just bake it into your hourly pricing as a cost of doing business. That means you don't create a separate line item for "credit card" or convenience fee (which is illegal in some states, anyway) but rather you just eat it and make sure your profit margin reflects that 3%.
Value adds: a freelancer's secret sauce
Lastly, what kind of value adds do you offer as a freelancer? What I mean by 'value adds' are all the extras that yield actual value to your clients that other freelancers may not offer or include in their rate at no additional cost. One of my best examples from myself is that I'm a career marketer but I'm ALSO a professional graphic designer who's designed for well-known brands as well as for Fortune 200 clients.
So when my marketing studio clients work with me, they know that I can easily translate our projects into high caliber design without the back-and-forth (and added costs) of bringing in an additional designer to work on anything from Facebook ads to email campaigns.
Another great example of a value add is that I've built up a really nice library of tools that make it much easier for us to work together – my clients get onboarded to a private client hub and I can upload all of our creative work to an interactive proofing tool so that they can just click and comment on visuals for feedback rather than having to type it out and try to make sense of it on a plain text brief. It saves them time and makes sharing feedback a breeze which is a killer value add to their client experience.
Value adds are a great way to infuse extra value into your client relationships and projects when done correctly!
Final thoughts before using the basic freelance rate calculator
It may sound like there are a lot of variables here to compute when it comes to figuring out your hourly pricing as a freelancer, and there are, but don't get hung up on getting it perfect. The beauty in being a freelancer is that you are the boss so if you find that you've set your rate too high and you just can't find clients in your target market who will 'bite' for that rate, you can adjust it downward and try again. Conversely, you can always raise your rate as you prove yourself and you build momentum with your freelance business.
FREE Freelance Hourly Rate Calculator
Take this free tool (below) for a spin to estimate your hourly rate based on your annual income goal, billable hours, time off needs for sick time and vacation time, and oh yeah... taxes.