Pricing out your freelance rates can be a challenge. But if you don’t take the time to carefully consider your prices, you could put you and your business at risk.
Setting the wrong price can lead to a slew of negative outcomes:
It could become impossible to pay your bills and, consequently, a mountain of debt will grow around you. What’s more, you’ll have to settle for free or cheap tools, and depend on shortcuts, which could lead to inferior work.
You could try to compensate for a too-low rate by working more hours. However, this not only will drop your rate even further, but you’ll inevitably burn out.
There’s also the matter of perception. If you charge too little compared to the value the client receives, a couple things could happen. The more common result is that you’ll attract clients who undervalue your work, which can make your life a living hell.
So yeah, setting the right freelance rate is incredibly important for your present and future as a freelancer.
What's Included in This Post:
What to Consider When Calculating Your Freelance Rate
There are various factors that freelancers should consider when setting their rates:
At the bare minimum, your earnings as a freelancer should cover your business expenses. What these expenses are differs from freelancer to freelancer, but they’ll likely fall into the following categories:
- Equipment — like computers and cameras
- Software — for your freelancing work as well as managing your business
- Furniture — like a desk or worktable
- Office Supplies — like pens and printer paper
- Utilities — even if you work from home, a portion of your electricity, telecom, and even your water bill keeps you in business
- Marketing and Sales — this includes everything from the website you build for yourself to the cost of printing business cards
- Travel — if you travel to gigs, gas and even your auto insurance count as overhead
What you should do is set up an expense tracking worksheet. Write down each of the categories along with the specific costs within them. Calculate them as annual fees. This way, your expenses will be evenly distributed throughout the year.
Divide your annual expenses by 12 and that will give you a baseline to work with for setting your freelance rate.
This spreadsheet will be very useful come tax time as well as when you do future revisions to your pricing (which you should do every year or so).
Time is money to a freelancer, even if you don’t bill by the hour.
Depending on what you do for work, you may spend the same amount of time on each job. If that’s the case, then the other factors in this post will be more relevant for your rate-setting exercise.
For those of you who do variable work, time is a critical rate-setting factor.
Take, for instance, a web designer. Let’s say the designer is building a website for a small ecommerce company. The company may be small, but this is no small task.
After considering all the other factors, the designer believes that $5,000 is a fair rate to charge. However, let’s say that he’s valued his time at $50 an hour and he expects the site will take 80 hours to complete.
This means he will have to spend $4,000 of his time to create the site (assuming no revisions or emergencies come up). This will leave him with a $1,000 profit. Only, that’s not accurate either since that profit will get eaten up by professional expenses.
This is why it’s important to do a careful breakdown of the numbers. Even if you don’t get paid by the hour, you should get paid for the time you put into a job.
This one might be a little controversial, but I don’t care. Here’s how I see it:
Life happens. You get sick, injured, burned out. Or you get married, your sister has a baby, or god forbid it’s Christmas. As a freelancer, it’s common to feel pressure to work through all the pain and to postpone the joy in your life because you need to make money.
While you can’t pass the extravagant cost of a trip to the Bahamas or a spa day here and there onto your clients, you can and should factor in things like:
- Time off for major holidays
- Sick days
- Health insurance
When you’re employed, most of these costs are accounted for in your wages. So why not do the same in your own business?
The cost of your insurance can get tacked onto your business expenses. As for the days off, come up with a number. In the beginning, you might only be comfortable with taking 10 days or 2 weeks off every year. That’s where many entry-level jobs would start you at, so that seems reasonable.
Once you’ve settled on that number, figure out what that time is worth to you.
For instance, let’s say your goal is to make $50,000 this year. In a 52-week calendar, you’d make around $961 per week on that salary.
Now, if you don’t account for the “cost” of your time off in your freelance rate, that means you’ll lose $1,922 this year (that’s two times your weekly rate). Ask yourself if that’s money you’re willing to let go of. If not, then you’ll want to bump up your rates a bit so you can provide yourself with some breathing room to step away from your work when you need to.
Depending on where you live, you are going to have to pay certain taxes to the government. Here in the United States, there are three types of taxes that freelancers may have to pay:
Everyone has to pay federal taxes. The percentage of your income you pay depends on your earnings.
State taxes depend on where you live. For instance, I’ve lived in four states as a freelancer and each handles taxes differently.
In New York, I paid a federal tax and a 5.08% state tax. Thankfully, I lived far enough away from NYC that I didn’t end up owing the local tax, too.
In Delaware, I paid a federal tax and a 5.05% state tax.
In Rhode Island, I paid a federal tax and a 3.13% state tax.
In Florida, I pay a federal tax, but no state tax.
By the way, SmartAsset’s Free Income Tax Calculator is a helpful tool that will allow you to keep track of what you owe to your local government.
When calculating your freelance rate, your tax payments are important to account for. Because you might be bringing in $8,000 a month, but you’ll realistically only have a $6,500 profit after taxes. This can be problematic for some freelancers, too, as tax payments don’t get automatically taken out of your earnings. So unless you’re putting that money aside every time an invoice is paid, your total earnings may be deceiving.
On a related note, your location may affect how much you charge clients.
For instance, in some places, you can control how much money you spend. So the cost of living might not have as big of an impact on what you make.
However, let’s say that your spouse works in Silicon Valley. There’s no escaping the exorbitant costs out there. What you charge will have to reflect that, within reason, of course.
Just keep in mind that higher rates must be justified. If you’re not providing a luxury service to wealthy clients, it may be time to consider moving to a new location where your rates will aptly cover the cost of living.
I do want to address the other end of the scale, too.
I used to work at an agency that paid freelancers in the Philippines to do web design and development. I was appalled when I learned that they were making $2 an hour.
My boss justified it by saying that $2 in USD was a lot of money to them. This is flat out wrong.
If you live outside the U.S. but provide freelance services to U.S. clients, you should be charging a comparable rate to what freelancers here charge. Never ever let a client take advantage of your location so they can pay you a measly rate.
The last thing to consider when pricing out your services is the value of what you do. Ultimately, you have to consider what the client is gaining and how much it’s worth to them.
Let’s use an example of a dogsitter. A client wants to hire them to stay with their two dachshunds for a week. Unless the client is going to stay with someone they know, there’s likely going to be a dog fee to pay — and for two dogs, too. Speaking from personal experience, this fee can effectively double the cost of a trip.
It’s not just the lodging fee I’m avoiding when I hire a dogsitter to watch my dogs though. I don’t have to limit my trip — like where I go out to eat or how long I spend on the beach. Again, this goes back to the idea that time is worth something to all of us.
As a freelancer, you need to be able to view these things from your clients’ point-of-view. If you’re not setting value-based prices, you’ll likely end up attracting bad clients — ones who abuse you and take advantage, among other things.
Every person's business looks and runs differently from others. However, the tools we use are more or less the same -- templates, checklists, calculators, and so on.
Instead of spending your time building a price calculator or expense tracking spreadsheet from-scratch, leverage the pre-made templates I've created for those very purposes.
I realize it’s going to be hard for some of you to set a fair and profitable rate in the beginning. But if you’re serious about freelancing as a career, you need to make a living wage. One that covers your business expenses. One that enables you to live comfortably. And one that helps you attract clients who value the work you do.
Don’t stress if you find that you’ve set your prices too low or high. Your freelance rates will evolve as you learn more about the market and the role you play within it. If you mess up by going too high or low with one client, fix it when pitching your services to the next one.