How to Calculate Your Hourly Rate (Without Making Your Brain Hurt)

but what on earth should you charge for the services you plan to provide?

Figuring out how to calculate your hourly rate can be a frustrating thing to do for a few reasons. One being that freelancers aren’t always immediately forthcoming with sharing their rates, and another being that rates can (and should) vary from person-to-person based on certain qualifiers.

We want to break this process down for you in a way that’s customizable and realistic, so that calculating your freelance rates isn’t such a daunting mystery. Once you’ve been able to gather the information you need, we have a shiny new Hourly Rate Calculator tool to help you get started. For now, however…

James is a graphic designer for a local T-shirt printing company. He loves burritos, good coffee, and settling in with a rerun of Downton Abbey on a Sunday night. (He’s a big fan, and doesn’t care who knows it.)

Up until recently, he’s been comfortable at his job. Desires for more creative freedom and flexible hours, however, have led him to the decision to branch out on his own. He’s got a few leads on some clients, and time on the weekends and evenings to do a little extra work. He’s ready and willing to get started… but how does he decide what to charge?

Now, we’re talking about daily life here. In order to maintain the lifestyle he’s currently living, James needs to be able to pay for things like his rent, groceries, internet, cell phone plan, etc… These are all things he’s not willing to sacrifice, regardless of career change. He’s got to sit down and organize all of his personal financial needs.

Compared to your typical 9-5, freelancing is a whole new world. If James decides to quit his day job, he’s going to suddenly become responsible for things like invoicing clients, tax deductions, and even paying for his own health insurance. These business expenses are absolutely not insignificant details, which is why it’s so important to approach your freelance rates with intention and research. There are many reliable freelancing resources (like Freelancers Union) that provide extensive lists of the possible business expenses freelancers might incur.

The scheduling freedom of freelancing is an incredible perk, but needs to be approached with a healthy dose of realism. Sure, wouldn’t it be amazing to work 20 hours a week, pull in $100 per hour, and buy all your friends Pina Coladas on Friday nights?

Luckily, James has a pretty good head on his shoulders, and is figuring he’ll work about the same hours he’s working at the T-Shirt gig… give or take a few. He’s going to be the boss, right?

There are 52 weeks in a year, but you need to factor in things like vacations, holidays, and the time you’ll need for business housekeeping, which could range anywhere from 20 minutes to an hour each day. This busy-work isn’t technically billable to your clients, so you shouldn’t factor those hours into payment.

Some contract work doesn’t allow for extended breaks, but some will let you take a work-free vacation to Maui. These are the things an Hourly Rate Calculator can’t pull out of thin air; you’ve got to take a moment to make your business plans concrete.

When you’re figuring out how to calculate hourly rate, you’ve got to spend some quality time with the numbers.

For the sake of an example, let’s say James has $20,400 in yearly personal expenses. His anticipated business expenses will be around $11,050. He plans on working 50 weeks out of the year at about 6 billable hours a day, which comes to 1500 billable hours per year.

At this point, divide your added expenses by the number of hours you plan to bill:

($20,400 + $11,050) / 1500 = $20.97

And there you have it. In order to only pay his bills, James will need to charge about $21 per hour.

Some people call it the Minimum Acceptable Rate, some call it the Survival Rate, but we’re going to call it the Ramen Rate.

But who can live satisfyingly on Ramen alone? How can James reach his goal of buying his friends Pina Coladas on Friday nights?

Let’s help James find his Pina Colada Rate. Now he needs to…

Numbers are good and formulas are important, but freelance rates are fickle, situation-dependent beasts. Once you’ve got your needs figured out, you can start to add the human element to your equation. It’s time to research the competition.

James is a graphic designer… which is a huge industry. There will be plenty of opportunities to research others who are successful in his field. Some freelancers will post their rates on their website or will send them upon request. Forum sites like Quora are fantastic resources, as they are frequented by peers in your field who are more than happy to share their experience and wisdom.

The other option is to simply ask, especially in a local setting. Developing relationships with others in your field will provide many benefits, including a better understanding of the local landscape and the rates that are being charged in your geographic area.

The next human to consider here is you. What is your experience level? If you’re a recent graduate, it’s a good idea to start on the lower end of the rates range. James, who has been designing for the T-Shirt company for three or four years now, will be able to charge more than someone fresh out of undergrad.

The reasoning here is that A) for the most part, potential clients will research and compare freelancer options and B) you don’t want to promise a product you can’t deliver, simply to score a higher rate.

Compare your numbers with the market’s numbers.

James knows, for sure, that he must make at least $21 per hour in order to survive. He also knows, after doing his research, that graphic designers are known to charge anywhere from $30 per hour to $1500 per hour.

This is where his local networking comes in handy. He’s discovered that many designers in his area are charging between $45 and $65 per hour. Since he’s neither a weathered veteran nor a spring chicken in the design world, he should choose to shoot somewhere in the middle and see how clients react when he provides them with project proposals.

Now, $55 is quite a bit higher than $21. What’s the point of figuring out your Ramen Rate anyway? Why not just shoot for a desired salary?