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How to Calculate Your Hourly Rate (and Why You Might Not Want One)

Man sitting at his desk in front of his laptop looking at his phone.

Be your own boss, set your own schedule, and decide how much you’ll be paid. To most, this sounds like a fantasy. But for freelancers, entrepreneurs, and contract workers, that fantasy can become a reality. However, like all dreams-come-true, reality is a bit more complicated.

One of the primary challenges of the gig economy is figuring how much you should charge for your services. Some clients offer jobs at a set rate, but many ask for your rates. If you haven’t yet set your rates, this can lead to some panicked number-crunching and a premature answer.

Setting rates is a delicate but necessary task. When done right, though, proper rates will keep you fairly compensated, without pushing away clients.

So, how can you set a fair hourly rate? And is that the only way you can charge and get paid for your work?  Here’s everything you need to know.

Three Ways to Calculate Your Hourly Rate

At most conventional jobs, you get paid per hours worked. Your hourly rate takes that concept and translates it into the freelance world.

However, that process is not without its complications. At a traditional job, you typically work eight hours per day and are paid for each one, regardless of how much work you do every hour. But as a freelancer, you’re expected to charge only for the hours you spend working on a specific project.

Because you’re doing more focused work for those hours, your freelance hourly rate might be higher than what you would get paid at a regular job. However, you want to make sure it’s not too high for your client pool.

There are a few ways to calculate what you should charge per hour; here’s how each one works.

Work Backward From Your Goal

One way to calculate your hourly rate is to set a target salary, and then work backward to determine how much you need to make each hour.

To set your target salary, calculate all your monthly expenses. How much do you need to cover your bills and living expenses each month? How much extra do you need for work-related incidentals, health insurance, and other costs no longer covered by an employer?

Remember, you also have to pay taxes on everything you earn, which can take up to one-third of what you make. After you total up all your expenses, add another 30 percent to cover your taxes.

Now, divide the total by the ideal number of hours you want to work each month. You’ll likely have less than eight billable hours per day because you won’t charge clients for your downtime. The result is the minimum hourly rate you need to charge to pay your bills.

Of course, your salary should also include some cash for fun spending, travel, days off, and the like, so your ideal hourly rate will be above this bare minimum. This infographic breaks down everything you should include in your calculations.

Use a Calculator

You can use an online rates calculator to automate some of this number-crunching. We like this detailed hourly rate calculator for all industries.

Of course, you shouldn’t just blindly go with whatever number the calculator spits out. But if you’re not mathematically inclined, or you’re worried you might forget to include something in your calculations, it can help.

Find Out the Industry Standard

It’s always good to do a calculation like the one above since it can help you with budgeting, as well as setting your rates. However, it’s also valuable to learn what the standard hourly rates are in your industry.

Rates always vary. For example, the rate will be lower for new workers and higher for those with specialized expertise. But if you get a broad idea of what other people charge, it will help you set a rate that doesn’t shock your clients.

Contently’s Rates Database offers a good breakdown of rates in some industries, including writing, editing, and design. You can also check industry forums or simply talk to people in your network. Talking openly about salary is frowned upon in traditional business circles, but gig workers should do so. After all, it’s the only way anyone knows if they’re being paid fairly.

Should You Charge by the Hour?

Woman pausing from working on her laptop to check her watch.

Calculating your hourly rate is one thing, but deciding if you should charge by the hour is another.

Except in cases where you absolutely have to, we don’t recommend that you charge by the hour. Why not? Once you’ve taken on a few freelance projects that pay by the hour, you’ll probably see why.

When you charge an hourly rate, it creates a strange relationship between your money and time. An hourly rate incentivizes you to work more slowly—the faster you work, the less you get paid. However, you also can’t work too slowly, or your clients will feel you’re taking advantage of them.

You’re left trying to hit this sweet spot between maximizing the time you spend on a project and stretching it too far.

However, if you spend longer on a project, it’s not really a good thing. The faster you finish (with quality results, of course), the more time you have for other projects or much-needed downtime. And most clients like it when you turn things in earlier than expected.

Plus, when you charge hourly, you face the constant distraction of trying to charge accurately. When you take a 10-minute social media break, step out to walk the dog, or spend a little longer at lunch, it affects your calculations. This can become a significant source of needless stress.

If you can avoid charging by the hour, do so. Try one of these methods instead:

  • Flat fee: Charge a set amount per project. You still set a deadline for completion, but you earn the set amount no matter how many hours you spend on it.
  • Per-day, per-week, or per-month: Your client pays you a fee to retain your services for a set amount of time, regardless of how many hours you put in each day.
  • Performance-based: The better the results you get for a client, the more you make.

Each rate-setting method has a situation in which it’s best. However, flat fees tend to work across the board for most projects, and in most industries. You need to have a strong, trusting relationship with a client before you try either of the other two methods.

You might also want to add a performance-based bonus on top of your flat fee. For example, you might get paid a set amount for each blog post you write, and a predetermined bonus for any that go viral.

You can also estimate the hours you’ll spend on a project to set your flat rate. However, don’t forget, your client isn’t really paying you for hours worked; they’re paying for the benefit they get from your labor. That benefit might be worth even more than the hourly rate you would set.

Of course, there might still be times when an hourly rate makes the most sense for a specific task or client. As you gain experience, you’ll learn the best way to set your rates in any situation. But no matter what, always have a contract with your client that outlines how, when, and how much you’ll be paid before you start working.

From side gigs to full-time freelance work, it’s always important to set proper rates, so you’re paid what you’re worth. Whether you need to charge hourly or not, this guide will help you get a fair price for your work.

Looking for more savvy money tips? Check out this cool budgeting hack next!

Elyse Hauser Elyse Hauser
Elyse Hauser is a freelance and creative writer from the Pacific Northwest, and an MFA student at the University of New Orleans Creative Writing Workshop. She specializes in lifestyle writing and creative nonfiction. Read Full Bio »
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