Freelancing: When $40/hour is more like $25

* Green Starred Bold Comments will be used for calculations at the end of this worksheet.

For most of my adult life, I have split my work-week between being a part-time employee and being a freelancer. Both situations have their advantages. I like the peace of mind that comes from steady employment, and I like the variety and higher pay that come from freelancing.

For the purpose of this article, let’s pretend that I am just a freelancer. When you go into freelancing, there are some important things to consider:

1. What will your schedule be? My target schedule is …

  • 30 Hours/Week Scheduled Work
  • 15 Hours/Week Learning, Marketing, & Emergencies
  • 4 Weeks/Year for Holidays, Sick Days, and Volunteering

Work 30 hours per week

Clients’ needs rarely fit into a perfect 40-hour workweek. Planning for a 30-hour week leaves plenty of flexible time that can be used to handle unexpected emergencies.

NOTE: It can be hard to find and keep a steady 30 hours worth of clients. To help maintain the balance, I now offer retainer packages for clients who want to ensure I save time for their routine maintenance while getting a discount for their loyalty.

15 hours per week increasing skills, marketing, etc…

This is the flexible time I referred to above. It is important to keep your skills sharp, market your services, ensure your brand has a strong reputation, keep accurate records, and be aware of any laws and regulations that you need to follow as a business owner. You need to build time into your schedule to take care of all these things. But all of these things can be put aside for a few days when a client has an emergency.

4 weeks per year paid holidays, vacation, sick days, and volunteering

4 weeks may sound like a lot. But between major holidays and family birthdays, there are 16 days I try to take off each year. Add a few medical appointments, sick days, a random road trip with my daughter, and the occasional day spent volunteering my services, 4 weeks worth of availability quickly disappear from the calendar.

* This leaves 48 weeks in the year for actual work and earning money. (48 weeks x 30 hours)

2. How much will you invest in your company?

I average $2700 per year spent on computers, cameras, software, subscriptions, and other tools that will help me help my clients to succeed. For the sake of nice, round numbers, and because little extras are always going to come up, I budget $3,000 per year for this.

* $3,000 per year budget for company-necessities

3. How much do you hope to charge per year?

I could start my calculations with how much I hope to earn per year. But clients are going to be more worried about what you charge them than what they are about what you have left.

There are so many factors when deciding what to charge! What is the going rate for the services you want to offer? What is the going rate in your area? How does your skillset compare to others’? And how much money do you need to live comfortably?

Let’s say I take all of these factors into consideration and decide that I want to aim for $60,000 per year. I can always come back and adjust this number if at the end of my calculations I decide it was too low.

* $60,000 per year charged to clients

4. Math Time

$60,000 per year divided by 48 weeks divided by 30 hours worked per week
60,000/48/30= $41.67 per hour charged to clients.

$60,000 per year minus $3,000 spent on business expenses
60,000-3,000= $57,000 per year income *

$57,000 minus 7.65% self-employment tax
57,000 x .9235= equivelant to $52,639.50 earnings as an employee**

$52,639.50 pear year divided by 48 weeks divided by 45 hours per week
52,639.50/48/45= $24.37 actual earnings per hour ***

* Although you need to charge enough to cover your business expenses, these will be deductible when you do your taxes. They do not count as part of your income.

** Did you know that self-employeed workers have to pay twice as much Social Security and Medicare tax? After paying income tax, for every $100 you earned, it will be as if you had really just earned $92.35. (Employers pay the extra 7.65% on behalf of their employees.) Multiply your income by .9235 for an idea of what the equivelant earnings would be as an employee.

*** As a freelancer, you will spend time on things other than working. My ideal schedule may only show 30 billable hours per week, but I spent 45 hours working on stuff that benefits my clients.

Conclusion

So there you have it. Although I may charge clients over $40 per hour, after you deduct the costs of doing business and count the time spent on developing skills that could benefit all of my clients, I actually earn less than $25 per hour.

All of a sudden, those guys who charge $85,000+ per year don’t sound so unreasonable.