How to Calculate Hourly Rate: A Guide for the Self-Employed

6 Steps for Figuring Out Your Hourly Rate

1. Determine how much you want to make each year.

You should always start out by determining the salary you want to make. Consider this your North Star for calculating how much you should be charging customers for your services.

For example, when I first started out as a freelance copywriter, I wanted to take home about $50,000 in my first year, as it was a significant pay bump from my 9-to-5 paycheck.

Knowing that’s what I wanted to make helped me set my hourly fee, as well as to ensure that I didn’t inadvertently end up not making enough money to pay my bills.

No matter what your ideal salary is, keep that figure in mind while reading the rest of this article. I’ll show you how to use it to calculate your hourly fee in a bit!

2. Guesstimate your yearly expenses and materials.

If you’re just starting out with your business, you probably don’t have the best idea as to how much you’ll spend on overhead, i.e., expenses, materials, and other business costs.

That’s why I recommend asking someone in your industry for a little guidance here, as they can provide you with a good estimate for what you should anticipate for overhead and other fees.

Remember, your overhead costs usually include:

• Retail space rent
• Internet and phone charges
• Electric/gas bills
• Office equipment
• Materials
• Transportation
• Advertising/marketing
• Business insurance
• Licensing fees
• Travel expenses
• Legal and accounting expenses
• And more

You’ll be adding the cost of your overhead to that North Star salary number, which I’ll show you how to do in a later example.

3. Add in your profit margin.

No matter what line of business you’re in, you absolutely need to build a profit margin into your hourly fee. This is the money you’ll pour back into the business, use to hire employees, or potentially even open a second retail location.

Keep in mind that your salary doesn’t count as profit, so don’t be tempted to skip this step! It’s important you take the time to calculate it.

In general, try to shoot for a profit margin of about 20% when calculating your hourly fee.

If you’re not sure how to do this, don’t worry — I’ll show you an example at the end of this article.

4. Determine your billable hours.

If you want to work about 40 hours each week, that means you should aim to have about 2,080 billable hours per year (40 hours each week x 52 weeks in a year).

Of course, that’s if you’re planning on working throughout the year; don’t forget to factor in any vacations you’re planning on taking when determining these hours!

So for example, if you want to charge $50 per hour and you’re planning on working 50 weeks of the year, this means you’ll need to bill for about $100K worth of work ($50 x 40 hours = $2,000 per week; $2,000 x 50 weeks = $100K).

This formula should help give you a good ballpark idea of what you can expect to take in for a salary.

5. When in doubt, do market research.

If you’re still not sure how much you should charge per hour, it might be time to do some market research to find out what others are charging per hour.

Here are a few ways you can do just that:

• Find a few people in your area who do what you do. Ask them how much they charge, and how they came to that hourly rate. Most small business owners are happy to share their own hard-won wisdom, so don’t feel like it’s taboo to ask others what they charge for their services.

• Do some online research to see if any of your competitors list their hourly fees or project prices on their websites.

• If you specialize in online services (like web design or freelance writing), check out sites Upwork.com or Guru.com and search through similar professionals and see what they charge per hour.

• If you specialize in contracting, cleaning, or other service-based work, sites like HomeAdvisor.com and Thumbtack.com can provide you with plenty of information to determine what others like you are charging in your area.

6. Don’t sell yourself short.

If you end up with a higher hourly rate than other folks in your industry, don’t immediately assume you’ve miscalculated. If you’ve been in your industry for a long time or are highly skilled, it’s OK to charge a higher rate.

Resist the urge to reduce your hourly rate just because you’re afraid you won’t get any clients.

Here’s why: If you set your hourly rate too high, it’s pretty easy to knock it down until you’re at the range you need to be. That’s because your customers won’t mind getting a discount, so it’s really a win-win situation.

But if you set your fee too low and want to raise it, there’s a good chance your customers will be disappointed. They may even opt to find another service altogether and go with a business with lower hourly rates.

Ultimately, setting a too-low hourly fee can make your business look cheap, and that makes it a lot harder to convince prospective clients that you’re worth their time and money.

An Hourly Rate Example

Let’s put these steps into action and calculate an example hourly rate.

• Jim, a carpenter for another company, wants to strike out on his own and become a self-employed contractor. He made about $50,000 at his current job, so he sets his North Star salary at $75,000. He knows from his previous job role that he’ll probably have $20,000 in overhead during his first year in business. He wants to earn a 15% profit and commits to working 40 hours per week for 48 weeks in the year, allowing for four weeks of vacation time.

• Jim adds his overhead to his salary: $75,000 + $20,000 = $95,000.

• He takes this number and multiples it by his profit margin of 15%: 15% of $95,000 = $14,250 profit; $95,000 + $14,250 = $109,250.

Finally, he divides this number by the number of billable hours he’ll work in a year: 40 hours per week x 48 weeks = 1,920 billable hours; 109,250/1,920 = $56.90 per hour.

Jim rounds it up to $60, thus setting his hourly rate.

Protect Your Hard Work with Business Insurance

Phew. That was a lot of math. But it’s important to practice putting these numbers down on paper so you can see the potential of how much you may be able to charge customers hourly.

But what about after you’ve charged them?

No matter how hard we try, mistakes can happen. Business insurance can help protect you in case a customer makes a claim about the work you did for them.

General liability insurance can protect you against claims of third-party accidents, property damage, or bodily injury. If for example, a customer gets hurt because of the work you do, your coverage could help to pay their medical bills.

Professional liability insurance can help protect you against claims of negligence or if a customer claims their business suffered due to the work you did. With a professional liability policy, you could be covered for any related legal costs to settling the claim.

Without business insurance coverage, your hard earned money could go to paying medical bills, for property repairs, legal fees, and more. You could take the chance on nothing ever going wrong and a customer never filing a claim, but 43% of business owners are involved in a civil lawsuit each year. Is it worth the risk?

Create a Process to Get Paid

Another action besides getting business insurance that may help to protect your business, is to create a system for invoices.

You want the process of working with you to be as smooth as possible, and that extends to the payment process. There’s no need to add friction to your relationship with your customers by making it difficult for them to pay you.

You can easily create a system by using invoice templates that you edit for each customer and job. Along with your hourly rate, you may also want to include other details and fees, like material costs, travel costs, and more.

To get an idea of what to include in your invoices and how to create an invoice template that works for you, download this FREE invoice template.

You’re Ready to Get to Work

Now that you have a good idea of how to create an hourly rate that works for you and are on your way to creating an invoice system that works for you, you’re ready to get to work.

Remember, processes change, just like your skill set does. As your business grows, don’t forget to revisit your rates and invoice process to see if any adjustments should be made. For more advice along the way as you grow your business, check out Simply U, a blog for business owners.