Q: I’m just getting started. How do I know what to charge?
A: What to charge is the question I hear the most. I’ll take it a piece at a time. This is part 1 of the “what do I charge” post.
Some people chose to bill by the hour; others bill by the project. Whichever you end up with, you need to figure out what your time is worth. Even if you never bill by the hour, you should know your hourly rate. In order to figure that out, you need to know what your expenses are, how much time you can bill, what your market is like, and what value you offer to clients.
Consider this: when you are an employee, your employer pays for your salary, pays half of your Social Security and Medicare tax, provides some benefits, and pays for your work equipment and supplies.
As a freelancer, you’ll pay self employment tax, health insurance, no employer contributions to anything including insurance and retirement accounts, no paid sick days or vacations. Not to mention overhead: computer, software, darn expensive software upgrades, fonts, pencils, office space, etc. You will also probably spend some money on professional organizations and networking events (even coffee meetings with potential clients a few times a week can start to add up). You might need an accountant (it’s a good idea to make sure you aren’t missing any deductions) and a lawyer (to help you create a contract that protects you and your clients). Your rate must be high enough to cover these expenses.
You also have the same personal expenses as employees. If you set your rate so low that you can’t pay your bills, your business won’t last, so you need to consider personal expenses as you think about rate setting.
As a business (yes, you are a business), you’ll be able to take tax deductions on your business expenses, but that’s a topic for another time.
Your homework: List all of your potential business expenses. If you currently have an employer but are planning to become a full time freelancer, figure out the value of the benefits that you receive: how much will insurance cost you if you have to pay for it yourself? Make another list of all your personal expenses.
Did you think of any big expenses you’ll have as a freelancer that you wouldn’t have as an employee?