Many freelancers charge by the hour. But how can you calculate the right hourly rate? After all, you want to earn well, but you also don't want to scare off your potential clients. In this article we will show you how to calculate your hourly or daily rate in 3 steps and which factors have to be considered.
Step 1: Calculate your needs
The first question to ask is: How much money do I need each month? If you are still quite new as a freelancer and were previously employed, this question may not be so easy to answer. Because as a self-employed person, you have other expenses and have to consider much more.
On the one hand, there are private expenses, for example for rent, food, clothing, mobility, insurance. As a freelancer, however, there are also many professional costs. These can be:
- Work equipment, e.g. laptop, monitor
- Office rent or coworking spaces
- Marketing expenses
- Tax advice
- Travel expenses
- Insurances, e.g. professional liability
Not to be forgotten either: As a freelancer, you pay taxes on your income, which depend on your income level. Unlike employees, however, taxes are not deducted directly from your income, but you pay them to the tax office yourself. As a rule of thumb for Germany, you can set aside about 30 percent of your income for this purpose, and you should set aside this portion regularly. So take taxes into account when calculating your hourly rate.
If you want to learn more about taxes as a freelancer, check out our article.
As a freelancer, you are responsible for your own health insurance and pension plans. You can either use a private health insurance or (if you have already been part of the statutory health insurance) use that one on a voluntary basis. In both cases, you pay the monthly contributions yourself and should take them into account in your requirements. The same applies to retirement provisions: you can use a private old-age provision and/or pay into the statutory pension scheme voluntarily. In any case, the contributions are additional costs that you have to take into account. Maybe you also need other freelancer insurance.
Also consider that you need a certain amount of savings – both for your business and for yourself privately, if unforeseen expenses arise.
If you list all these sums, you will get your monthly requirements and can quickly calculate your annual requirements. This can be useful because you won't earn the same amount every month. In the summer and around Christmas, many freelancers experience a bit of a lull in orders because their clients are on vacation. And you yourself probably want to travel or take time off every now and then as well, and can't work through the whole year equally. To compensate for these times, it's good to know your annual requirements.
Just starting out as a freelancer? Check out our complete checklist so you don't miss anything.
Step 2: Determine your available working time
A year has 365 days, but you can only actually work on part of them. You should subtract:
- Weekends (104 days)
- Holidays (depending on the year and state, approx. 12 days)
- Vacation (depending on your wishes, 20-30 days)
- Sick days (approx. 10 days)
- Time for education and events (depending on your business field, approx. 5 days)
- Possibly days for illness of children
So you have about 205 working days per year at your disposal, which is an average of about 17 days per month.
But even on these days, you can't work for 8 hours. As a freelancer, you need time for unpaid activities, for example customer acquisition or accounting. Maybe you have idle time in between and wait for the next assignment. It is often recommended to plan only half of the available time per week as billable time, for example 20 hours for a 40-hour week. However, it depends a lot on the type of work you do. If you work with a few clients on a long-term basis, you will hardly need any time for client acquisition and your administrative workload will also be rather low. On the other hand, if you are a consultant with many short individual bookings, you will have to spend a lot more time on acquisition.
Based on your situation, you can now determine your available working time. For example, if you can bill 25 hours per week or 5 hours per day, that's 1,025 hours for 205 working days per year.
Step 3: Calculate your hourly rate
You now know your billable working hours per year. In these hours, you have to generate your annual requirements. Let's assume you need a monthly turnover of 5,000 euros. This corresponds to an annual turnover of 60,000 euros. If you have 1,025 billable hours per year, your hourly rate would have to be around 58.50 euros.
That's all well and good, but ideally you can not only cover your needs with your work, but also create a nice life for yourself and let your assets grow. So the question is not only "How much do I need to earn?", but also "How much do I want to earn?". After all, as a freelancer, you can set your own rates. So you should also think about what your desired revenue is beyond what you need. Maybe this is 7,000 euros per month, for example, or 84,000 euros per year. In our example, your hourly rate would have to be around 82 euros.
In practice, this can mean for you: You go into a negotiation with your desired hourly rate, but it is okay for you to agree with the customer on a somewhat lower one. However, the hourly rate that covers your needs is your minimum, and you do not accept any projects below it.
Simple hourly rate calculator for freelancers
Here you will find a table that illustrates the procedure at a glance. You can use it as an hourly rate calculator by writing it down and entering your individual numbers. We have filled it out with an example.
|Working days per year
|Billable hours per day
|Billable hours per year
|Annual requirements : Billable hours per year = Hourly rate
Consider common hourly rates
The approach we have taken so far is based on your needs and wishes. This is good, but you should also compare it to the usual hourly rates in your industry. It gives you a good basis for negotiations if you can estimate your price in relation to the average.
For example, take a look at statistics or talk to other freelancers in your field. Also take into account various factors such as your experience, your specializations and the corresponding demand. This way, you will be clear about your market value. And who knows, maybe you'll realize that you can charge even more than you thought?
Hourly rate or daily rate: Which is better?
As an alternative to the hourly rate, you can also charge a daily rate as a freelancer. This is a good idea if you do large packages of work for one client and perhaps only have one or two clients at a time. Then you can use a daily rate to determine exactly how much you will earn in a week or a month.
With a daily rate, you often don't have to be as accurate with your time tracking, and you don't have to record each task individually. You save administrative effort and simply work for the client for one day. However, this only works if the project and your own set-up allow it. For example, maybe you mostly work only half days for personal reasons. Then you still have to record your hours and create days from the packages, so you haven't gained anything in this respect.
By the way, the customer may want to agree on a daily rate that is lower than eight hours at your regular hourly rate. That may be fine, because you probably don't work a full eight hours productively anyway, and if you bill at an hourly rate, you'll probably end up with a lower billable number of hours per day. But of course, make sure the price is still fair for you.
Does an hourly rate make sense at all?
Many self-employed people opt for a different model: they don't sell their time, but a fixed service, for example a logo design or a blog article. The advantages of this:
- You know from the start how much an assignment will earn you.
- The customer also knows the price immediately and there are no questions like "Couldn't that have been done faster?".
- If you have a lot of experience, are very productive and get your services done in a short time, you increase your profit.
Whether this way is right for you depends on your services. If you provide only clearly defined and well-calculable services, the approach is worthwhile, and you can write an offer for your potential client. But if you do a lot of different tasks for one client, charging by time is often easier. Also, if you are still quite new as a freelancer and cannot yet estimate the effort so well, hourly or daily rates are often better. Otherwise, it can happen that you need longer than expected, and the job is less profitable for you.
Even if you offer services with a fixed price, it makes sense to calculate your hourly rate as a freelancer first. This is a good basis to define your prices. You then simply calculate how long you need on average for a task and set your desired hourly rate.
Want to know more about the topic of rate calculation and what it has to do with your mindset? Check out this webinar recording and learn from Helen Hill how to up your rates successfully:
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