Young entrepreneurs don’t charge enough for their time. And clients are shocked when they hear anything over $30 an hour.
I bid out freelance jobs at $80 per hour. That seems like a lot, but it’s really half as much as I should be charging. My friend’s dad told me that big companies contract out to developers and designers for $165-$245 per hour.
When we take a closer look at where that $80 per hour goes, you’ll realize it’s nowhere near how much you should be charging.
Only 50% of the Time is Billable
When you’re starting with freelancing, most of your time is spent setting up your business and putting your systems in place. Then you have to land your first few customers.
Up to this point, you’re working for free or even paying to work.
When you have a few clients, a lot of your time is still spent on non-money making activities like email, phone calls, and working on your own business. Let’s say 50% of your time is billable.
$80 per hour turns into $40 per hour.
50% Goes Back into the Business
When you start getting paid for your work, you need to build a solid financial base so your company can grow.
For example, with a web development company, you want to sub-contract the design and development work to other freelancers. But you have to pay them immediately after the work is done and it might be another month or two before you get paid.
So you need to have at least a couple grand in the bank for every current client that you have. To build that base, it’s good to put 50% of your revenue back into your business savings.
$40 per hour turns into $20 per hour.
15.3% for Self-Employment Tax
Now that you have $20 per hour profit from the original $80, you have to sack away 15.3% to pay Self-Employment tax at the end of the year.
$20 per hour turns into $16.94 per hour.
About 15% Federal Income Tax
In addition to SE tax, you’ll have to pay federal income tax. If you make $40,000 per year in profit, income tax will be another 15.3%. If you earn $80,000 per year, your federal income tax will be 21.3%.
Conservatively, let’s say you’ll have to take out another 15% for federal income tax.
$16.94 per hour turns into $14.40 per hour total.
$80 per Hour Freelancing = $28,800 per Year Salary
If you take that $14.40 hourly wage and assume that you’ll be working 40 hours per week, that’s equivalent to a $28,800 salary (after taxes).
Raise your rates and bid by the job so you don’t shock your customers.
Hourly Freelance Rate Table
Here’s a table of freelance rates, real wages, and estimated salaries (after taxes) based on the previous assumptions.
|Freelance Rate||Real Hourly Wage||Estimated Yearly Salary|
Unless you have other people do the work, you have to charge out at $280 per hour to walk away with $100K at the end of the year.
Update: Since publishing this post, I co-founded a simple freelance marketplace called AwesomeWeb. If you’re a freelance web designer or developer and you need more clients, find out more and sign up here..