Most people are under-charging for their freelance services.

Maybe you're charging $30/hour because you know that if you worked 40 hours per week, 50 weeks a year, you'd be making $60k a year.

The problem is that you're not considering two key things:

1. Your business expenses cut into your yearly earnings
2. Your work hours are not the same as your billing hours.

Let’s dive into how to properly calculate your hourly rate!

Step 1. Gather your expense data

This might be the longest step but it’s very important. You need to take the time to figure out how much money you’re currently spending to run your freelance business.

If your instinct is to think, “Nothing. I’m a web developer. I’m just using my laptop.”

Well you just missed out on your first expense.

If you’ve been working as a freelancer for the last year, take the time to go through your credit card and bank account statements for these expenses:

• Internet
• Software subscriptions (invoicing or contract-creation software, CRMs)
• Computer, external monitor, or any other hardware
• Repair or maintenance costs for that hardware
• Courses you took to develop your skills
• Liability insurance

If you haven’t been working yet for a year, look forward to the upcoming year and make an estimate on what you think these costs might be.

Step 2. Figure out how many hours you are working per year

You can’t work 24 hours per day, 7 days per year, 52 weeks of the year. (Nor should you want to!)

One of the awesome things about freelance is being able to make a schedule that works for you and allows you to live a life outside of work.

But in order to do that you need to figure out how many hours per year you’re realistically going to be able to put towards your freelance business.

If you’re jumping in with two feet, and planning to make it your full-time job, that’s great, but are you going to work weekends? How many vacations are you going to take per year? What happens if you get sick?

Figure out your yearly working hours by noting:

1. How many weeks will you be working per year? (Subtract holidays, desired vacation time, and an estimated number of sick/personal days you’ll need)
2. How many hours per week are you planning to work?

Step 3. Determine how many of those hours are billable

A hard truth about working freelance: Just because you can work 40 hours a week, doesn’t mean you can bill 40 hours a week.

There will be hours and hours of work that you dedicate to your business that you won’t actually be able to charge your clients for.

You can’t charge your clients for the number of hours you spend on:

• Marketing your services
• Creating and sending invoices to your clients
• Registering your business and filing your business taxes
• Learning new skills to apply to your business
• Answering emails
• Free consultation calls
• Software set up

And yet, those hours will add up. So whatever your hourly billing rate is needs to take into account that you need to get paid for all the hours you spend working on your business.

Spend a couple weeks tracking how much time you spend working on the administrative side of your business vs how much time you spend actually on client work.

Then, to figure out the number of hours that you’ll bill for per year.

[Billable hours per week] x [Work Weeks per year] = Billable hours per year

Step 4. What is your desired salary?

If we were to ask, “what is your desired salary?” I’d be hard pressed to find anyone who doesn’t want to be making at least $100k per year. (Especially with inflation and the cost of housing nowadays, am I right? 😬)

But, in this case, think about finding a balance between:

• What you feel your services are worth (based on your experience, time in the industry, education, etc)
• How much you need to maintain a relatively comfortable lifestyle that doesn't have you stressing about your bills and ability to pay rent all the time

This can fluctuate based on your life expenses and the cost of living for where you are.

Note: Your desired salary is before income tax.

Step 5. Put it all together

With all this information we can now put it all together to calculate your billable rate. This is the formula:

([Your Desired Yearly Salary] + [Yearly Expenses]) / [Billable Hours] = Hourly Billing Rate

Let’s say that $60k a year would allow you to pay your bills comfortably, put some money aside for retirement and cover your monthly rent.

You add up all your business expenses for the year and it has you at about $1,200.

(Note: This is definitely on the very low end of the spectrum for yearly expenses, but when you’re just starting off and have limited clients, you can usually make do with less fancy equipment and software!)

And let’s imagine that you’ll work 47 weeks per year, this is considering that you’ll want about 5 weeks of vacation, holidays and sick days (25 days).

Maybe you spend an average of about 28 hours a week on billable work and another 12 hours per week on admin work for a total of 40 hours of working per week.

Plug it all in to the formula and we have the following:

($60,000 + $1,200) / [(28 hours) x (47 weeks)]

= $61,200 / 1,316 hours

= $46.50/hour

This is your billable rate before sales tax.

Step 5. Market comparison and ongoing adjustments

Once you have your hourly rate, you’ll want to do a few things:

1. Compare it to others on the market with your similar skills, education and experience and adjust accordingly
2. Create pricing for specific projects that keeps your hourly rate in mind
3. Adjust every 6 to 12 months to keep in mind your change in experience, the market, and any increase in your expenses

Have you been charging enough for your services?