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How to Calculate Your Contracting Rate

When you’re first starting out as a freelancer, one of the biggest challenges is setting your hourly rate. Charge too much, and you’re going to drive away potential clients. Charge too little, and you have to work more hours to earn your target salary. By doing a few calculations, you can figure out an hourly rate that pays you well and is fair for your clients, while keeping a steady stream of work flowing into your business.

Set Your Annual Salary and Time Targets

It’s not enough to know what you might be able to charge. You also need to know your minimum acceptable rate to ensure you’re making enough to both meet your financial needs and feel valued. The minimum acceptable rate is the lowest equivalent hourly rate at which you’re willing to work. Test several minimum rate calculations to come up with a realistic figure. It helps to know how long different tasks take, especially if you’re charging by the project rather than by the hour. Say you’re a freelance writer who produces blog posts for clients. You might know that it takes you roughly three hours to write a blog post of a certain length. You can then figure out how to price your services to meet your minimum hourly rate. If you want to make at least $25 per hour, you need to charge about $75 for a blog post.

If you’re not sure what to set as your minimum hourly rate, think about the annual salary you want and the number of hours you’re willing to work per year to earn that amount. If you’re transitioning from a salaried position, you can use a similar annual salary as your target since you’re used to living on that amount. Otherwise, research salary ranges for the position online. While your target salary can be whatever you want it to be, if you’re charging a much higher rate than normal, you must have the results to back it up. You also need to take into account your financial needs: Look at your budget to determine the minimum amount you need to keep your bills paid.

To determine your hours target, start with the number of working hours per year, which is 2,080. That breaks it down to 40 hours per week for 52 weeks. Subtract the number of hours you expect to take off each year. If you want a standard two-week vacation, that takes it down to 2,000 hours per year. Finally, multiply that number of hours by 0.75. This accounts for the time you spend working on activities you can’t bill to a client, such as marketing your business and communicating with clients.

You can also adjust the number of hours you want to work to fit your schedule: Maybe you only want to work 30 hours per week or you’re willing to work 60 hours a week. You can use those numbers to help figure out how much you need to make per hour.

Determine Your Adjusted Annual Salary

Your adjusted annual salary is the target salary you just set, plus the hidden costs of freelancing. Those hidden costs are the financial benefits you normally receive from your employer that you now need to cover yourself. Benefits vary depending on the job, but you may no longer have any insurance coverage previously paid for by an employer. You need to pay for your equipment yourself as well as any repair or replacement costs. When you have a job, your employer matches your Canada Pension Plan (CPP) contribution; as a freelancer, you must pay both your share and the employer's share. Starting January 2, 2022, the CPP rate for self-employed taxpayers increased to 11.4% of CPP pensionable earnings.

You also need to pay your own income taxes when you work as an independent contractor or freelancer. Most self-employed individuals pay their income taxes in instalments throughout the year. Whether you pay in installments or in a lump sum, you owe the taxes at some point, so figure that into the costs when coming up with your rate. Your adjusted salary takes those expenses into account to make sure you earn enough to pay your bills and cover the extra costs.

Divide the adjusted salary amount by the number of hours you plan to work. That number is the hourly rate you need to charge for your desired annual salary. Say your adjusted salary is $65,000 per year, and you plan to work full-time with 2,000 hours going toward actual client work. Divide $65,000 by 2,000 to get $32.50. That means you need to set your rates to earn at least $32.50 per hour to reach your target.

Consider Client-Specific Adjustments

It’s smart to be flexible with your rates depending on the value of the client. A client who needs you consistently or who wants you for a large project is much more valuable than one who needs you for just a few hours. You may want to lower your rate if it makes the difference in getting an important client; for a client that only needs a small amount of work; think about charging more to ensure the project is worthwhile for you.

Evaluating the Market

Unless you can provide a truly unique or niche service, you probably exist in a crowded field of fellow freelancers. Many of these freelancers are direct competitors and bid against you for contracts. In the process, however, each competitor provides you with valuable information about what an acceptable rate is and how to win projects.

Suppose you’re a freelance web designer, and you create a profile on Upwork or 99designs. Those sites ask you to post a going rate, not necessarily what you get paid for a specific project. It’s a visible rate potential clients can use to predetermine if you’re a viable candidate for their job. You can use the site to think like a potential client who wants to hire a designer with your skill set. Do a search and find other web designers with similar qualifications to see their rates. You can use their quoted rates as a baseline for the value of your services.

Track Your Time

Track your time every single day and for every single job. Include the time it takes to perform research, locate new clients, and negotiate. You might look into job-tracking software that has a time-log component or set up a simple Excel log on your own. Adjust your time-management habits and the rates you charge to ensure you’re hitting your target hourly income.

Negotiation and Feedback

Haggling is a part of being a freelancer. You may need to adjust your rates for different projects or try to convince a client to pay you more than they plan. The early parts of client interaction, such as the initial bid and internet conversations, are an information-gathering session for each party. Don’t be afraid to adjust your rate based on new information as long as you can justify it to the client. In some cases, you may need to decide if you’re willing to lower your hourly rate to fit what the client can offer, or if you’d rather look for other clients who can pay more.

Rate Adjustments

Periodically review going rates in your industry and pay close attention to how much interest you generate from clients. If you’re consistently a finalist and winning every contract you bid, chances are you’re not charging enough for your work. If you aren’t getting any bites, consider lowering your asking price. You may also want to adjust your rates as you gain experience or expand your expertise. For example, if you offer accounting services on a freelance basis and earn a new designation, you might increase your rates. If you’re a freelance writer and become an expert in search engine optimization (SEO), you might charge more for SEO services.

Calculating your hourly rate doesn’t need to be difficult: With the appropriate numbers, you can decide on a rate that doesn’t leave you second-guessing yourself when clients ask for a quote. You can also track your income in QuickBooks to make sure you’re hitting your targets. The QuickBooks Self-Employed app helps freelancers, contractors, and sole proprietors track and manage their businesses on the go. Download the app.

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