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Summary:

We’ve given some advice for setting freelance hourly rates before, including a rough rule of thumb for those leaving more traditional employment (multiple your hourly pay as an employee by 2.5 to 3.0). But a new blog post from Pat Allan offers another way to think […]

We’ve given some advice for setting freelance hourly rates before, including a rough rule of thumb for those leaving more traditional employment (multiple your hourly pay as an employee by 2.5 to 3.0). But a new blog post from Pat Allan offers another way to think about this, and one worth running through if you’re new to freelancing.

There are basically three variables to juggle: your total income for the year, the number of hours you’re going to work, and your hourly rate. If you know what any two of them are, you can figure out the third. So, if the goal is to come up with an hourly rate, you need to determine your target total income and work hours.

Start with your target income. A good starting point (if you’re considering leaving full-time work) is your current annual salary – but that’s not the end of the story. If you want to stay on an economic even keel, you need to add in all of the expenses that your employer currently covers. This might include:

  • Employer share of taxes
  • Employer contributions to requirement
  • Conference registration and travel
  • Training courses
  • Medical insurance contributions
  • Paying lawyers and accountants
  • Basically, if you become your own employer, you’re responsible for paying for “fringe benefits” (or doing without). You might find that you need to bring in $90,000 per year to have the equivalent of a $60,000 salary.

    Now think about how many hours per year you’re going to work. 52 x 40 – That’s 2080 hours, right? Not by a long stretch. Consider:

  • Time off for vacation and holidays
  • Time spent attending conferences
  • Time spent looking for work instead of working
  • Lunch breaks
  • Time doing estimates or spec work
  • A more realistic estimate is probably 40 working weeks per year (if you’re lucky finding work your first year!) and 6 hours per day. If you’re taking weekends off, that means 6 x 5 x 40 = 1200 working hours per year. Do the math, and in this simple example you’d need to set your freelance rate at $75 per hour to match your current salary.

    That’s not the end of the story, of course – you need to think about what terms you’re going to bill people on and what the market will bear, among other factors – but it’s a good way to sanity check any plans you have to go freelance.

    By Mike Gunderloy

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    1. Mike,

      One thing I do too is to tell people that they can get discounts if the commit to a certain number of hours. For example, if someone needs me for 3 months and commits to that I can give them a discount because I no longer have to spend time looking for work in those 3 months. You need to structure this so that you’re covered if they decide a month in that they don’t need you anymore, but it serves to open the conversation about rates well.

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    2. In determining an hourly rate, the total wrap rate is about 2.0 or 2.1, meaning a 2 to one ratio. So if you want to earn $60K, you need to bill out about $120K. The additional $60K will cover all the expenses listed above, plus your overhead expenses such as PC, Internet, phone, cell phone, office, office supplies, marketing, travel, etc.

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    3. I use the ‘Ten Day Rule’ which means I have to make enough in ten days of consulting each month to cover my monthly nut. Figure out what you need, divide by ten. See http://bit.ly/uqiq for more info.

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    4. Nice article looking into freelancing myself due to the poor job market. http://investormation.com

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