Setting Your Rates

Learn how to set your rates like a pro and grow your earning potential over time

 If you’re an independent contractor, one of the biggest conundrums of securing work is how much cash to charge for your services. You may often worry about bidding too much and losing out on the job or bidding too low and underselling yourself. A pay rate isn’t always up to you, of course. A potential client may decide on a fee, but you still have the choice of whether to take on a gig. That means you should have a bottom line and say no to work that’s below it. Likewise, you should have rates that help you meet and even exceed your income goals so you can pay your bills, save money and enjoy life. Here’s how to make it all work with a handy formula.

Don’t make this mistake!
If you’ve resigned from an on-staff position to go freelance, you might be tempted to distill your former salary (or a desired salary) into an hourly rate. This is a common pitfall. If you were making $60K, for example, you might divide that by the number of weeks per year (52) and then divide that result by 40 hours of work per week, to reach an approximate rate of $29 per hour. That might sound reasonable, at first, but take a closer look. You’re not factoring in your self-employment costs. So throw salary out the dang window. As a freelancer, you’re not locked into one anyway—ever.

The costs of being your own boss
As an independent contractor, you’re running a business, even if you’re sitting on your sofa tapping on a laptop with the cat nearby for moral (or shall we say meow-al) support. There are costs associated with being self-employed, and your rate needs to cover them so that these expense gets spread across your client base. Some of your costs will be tax-deductible, while others will not. (Talk to your tax professional for specifics.)

Operating costs: Your general expenses will vary by industry, but consider all the things you’re paying for to do your work—like an internet connection, a monthly fee for an invoicing platform or creative software licensing, any marketing or advertising, a co-working membership or a space you rent, home office expenses, supplies or tools, non-reimbursed travel fees, car depreciation, etc.

Health insurance: Unless you’re under a partner’s or other family member’s employee plan, you’re required to fork over the cash for medical coverage.

Retirement savings: No one else is socking away those pre-tax dollars for you if you’re self-employed, so it’s in your best interest to set up a retirement plan and factor your contribution into your rate. (Set up an automatic monthly transfer. You won’t regret it.)

Income tax: When you’re an independent contractor, you don’t have an employer to withhold your income tax from your paycheck. So you’re in charge of paying Uncle Sam.

Paid time off: No, you can’t expect your clients to cover the cost of your adventure to Bora Bora, but you should factor time off into your rate. You simply can’t work all the time. (And you may not have work to do all of the time, either. Every freelancer goes through feast and famine cycles.) Plus, we all get sick (or have to take care of someone else who is), and we all need breaks from work to rejuvenate or to take care of personal needs. You’ll also likely celebrate certain holidays along with the rest of your family and friends.

Now, let’s take a moment to ruminate on that previous example. If you set your rate at $29 per hour based on a goal of making $60K per year, you would have to work 40 hours every single week to make it happen. Bye-bye, vacation! And prepare to bring that laptop to Thanksgiving dinner.

How much time off should you factor in? With 52 weeks in a year, that translates to 260 potential working days (when considering a 5-day work week). According to the Bureau of Labor Statistics, Americans with five years of experience at their jobs typically get about 15 days of paid vaycay. As an independent contractor, you should take more. Account for 40 to 45 days off with a mix of planned vacation, unexpected sick or personal days, and general holidays. You’re really only going to be putting your nose to the grindstone on about 80% of potential work days.

Housekeeping and development tasks: In this case, housekeeping doesn’t have anything to do with wielding a mop. Think of all the work you do in a week that isn’t really billable to a client. You have to send invoices, prepare project estimates, plan your schedule, respond to a litany of emails, market yourself, learn new skills on the go, and more. Even if you work 40 hours or more per week, you might spend 10 or more of those hours doing these types of tasks. Plus, you likely take a break to eat. On a salaried job, you have paid breaks. How do you know how much time you do billable work? Use a time-tracking app like Toggle for a few weeks to test it out.

Profit: If you don’t account for profit in your rate, you will have difficulty keeping money in the bank and making your business viable.

Calculating a rate
First, set a monthly income need. What kind of cashflow do you require to pay your bills and save money? If you had a salary previously, you could use that as a starting guideline. Someone making $60K, in keeping with our previous example, would earn about $5K per month (pre-taxes). Now decide on a monthly income goal. This goal should be practical, meaning within reach, and help you live more comfortably, grow your business, and save more cash. In our chart, we’ve chosen the example of $6K.

$5,000 $6,000
COST OF BEING YOUR OWN BOSS monthly expenses (examples)
Avg. operating cost: Expenses will vary by industry. And if you increase your rate, your costs will likely go up, especially if you funnel money back into your business to grow it. $700 $1000
Health insurance: Cost will depend on your premium. $500 $500
Retirement: Your annual max allowable contribution and the tax-deductible amount of that contribution will depend on your retirement plan. $500 $500
Time off: If you’re only working about 80% of the time, you’ll need to account for that other 20% here. 5,000

x 0.20

1,000 6,0000

x 0.20

Housekeeping: If you spend 10 of your 40 hours on these tasks, you’ll need to account for 25% of non-billable time here. 5,000

x 0.25

1,250 6,000

x 0.25

Profit: Aim for at least 20%. 5,000

x 0.20

1,000 6,000

x 0.20





Taxes: Your tax liability will vary based on multiple factors including total income, state laws, filing status, and your deductible expenses. Check with your tax professional for accuracy, but a good rule of thumb is to aim for 20%. 9,950

x 0.20

1,990 11,900

X 0.20


+ 1,990


+ 2,380

Monthly income $11,940 $14,280
Weekly income (divide by 4.333 weeks of a month) $2,756 $3,296
Daily income/day rate (divide by 5 days of the week) $551 $659
Hourly income (divide by 8 hours of the day) $69 $82


Putting it all together
Your need-based rate now becomes your bottom line. You shouldn’t take on projects that come in below this rate. Instead, you should negotiate rates closer to your goal. The caveat is that you might find yourself staring down a project that interests you but doesn’t pay well. If you know you have another option on the docket at a much higher rate, you might still be able to take on the potential gig that has a lower rate, as long as it won’t eat up too much of your time. Knowing what you have to bring in each month, week, or day to meet your income needs and goals helps you to assess these unique situations. As long as it all evens out in the end, you have a little wiggle room.

Your hourly rate range can be used to determine a project rate, which can often be more palatable to clients and more beneficial to your business. It can also be used to help assess whether fees presented to you are lucrative. Your field might have a unique way of measuring rates. In the journalism industry, for example, many publications offer freelance writers a rate based on the assigned word count. After a quick estimate of time involved for researching and crafting a piece, a reporter can determine if the assignment is lucrative enough to accept.

As a final note on rates, make sure to reassess your fees often. You should recalculate your formula, if you find that you’re spending more on business expenses, needing more time off, spending more hours doing housekeeping tasks, or feeling like you aren’t making ends meet. Likewise, if you’re consistently meeting your GOAL funds rather than just what you NEED, it’s time to move your goal higher and keep growing.