How to Set Freelance Rates When You’re Clueless

How to Set Freelance Rates When You’re Clueless

When I started freelancing nothing felt more foreign to me than knowing what to charge.

Sure, finding clients was hard but when I started getting interest I was met with my next challenge: setting my rates.

There was so much I didn’t know so I winged it. In the end it all worked out but there are definitely some considerations I should’ve made instead of just choosing a random number.

Today I’m sharing everything about setting rates that I wish I would’ve known from the beginning.

You Need to Consider Self-Employment Taxes

Before you can determine what to charge you have to consider expenses and self-employment taxes.

As a freelancer you’re not going to have a ton of expenses. In fact, you don’t need to buy anything in the beginning. (Although starting a website where you can point prospective clients to is a good idea. But that’s only going to run you around $70 per year.)

The big thing that you need to take into account when you’re getting started is taxes.

Freelancers are hired as independent contractors. This means there are no taxes taken out of the money you earn. If you charge $25 per hour and work 4 hours you’ll receive $100. You’ll then be responsible for sending in self-employment taxes yourself.

Taxes can often scare off new freelancers but they shouldn’t!! You pay taxes as an employee, taking home much less than you gross. Same concept here. The big difference is that you’re treated like an employer. Yes, you pay more taxes but you can also charge much more as a freelancer than you do as an employee and you can write off your expenses.

When I freelance I earn about 4-5 times as much as I did at my last day job. Yes, I pay higher taxes but my take home pay is also MUCH, MUCH higher. It’s worth it.

Here’s a breakdown of what you’ll have to pay:

(And remember these amounts are for your NET EARNINGS. Total income – expenses = net earnings)

Social Security and Medicare 15.3% – When you are employed and taxes are withdrawn from your check your employer is matching the amount of Social Security and Medicare you see withheld on your paystub.

If you earned $500 per week and had $38.25 withheld from your check your employer is sending the government $76.50.

As a freelancer you are now responsible for that match.

You can read details about it here.

Income Taxes (Varies) – Next we have federal and state income taxes. How much you pay in these taxes will vary person to person. Some factors that influence this is how much you earn, how many dependents you have, etc.

For me this has ranged from 5-15%

Looking for a better way to track your business income and expenses. Here's a free business income worksheet printable plus a Google Doc to get you started.

Just to give you an idea I’m currently paying 30% total in estimated self-employment taxes. (I use GoDaddy Bookkeeping to automatically track and calculate this for me. I used to use this free spreadsheet.)

I’m not a CPA so I cannot give you specific advice but you 100% need to put money aside for taxes.

One More Thing to Think About

Before we figure out what to charge I want to remind you of one more thing: you’ll have to create your own benefits package. If you’re currently working a full time job and freelancing on the side then this probably isn’t a huge deal.

However, if you’re planning to freelance full-time you’ll need to think about getting your own health insurance and starting a retirement account.

We’re going to figure out what to charge with the assumption that freelancing is your side hustle and that you don’t need to pay for a benefits package at this time.

Your “After-Tax” Rate at Various Amonts

Now let’s get down to business. We’re going to figure out what to charge based on the assumption that you’ll be paying 30% in taxes and have little to no expenses.

(If you do have expenses make sure you deduct them from your total income before figuring taxes and hourly net pay rates.)

  • If you earn $20 per hour your take home after taxes will be $14/hr.
  • If you earn $25 per hour your take home after taxes will be $17.50/hr.
  • If you earn $30 per hour your take home after taxes will be $21/hr.
  • If you earn $40 per hour your take home after taxes will be $24.5/hr.
  • If you earn $45 per hour your take home after taxes will be $31.50/hr.
  • If you earn $50 per hour your take home after taxes will be $35/hr.

From doing these calculations you can better see what you have to charge in order to net what you need.

When You Have No Idea What to Charge (The Inch Up Method)

If you have no idea where to set your rates the lowest you should go is $20/hr.

If you pitch a rate of $20/hr. and you successfully land your first client you need to ask for $25/hr. from the next potential client you come into contact with. If that goes well you charge $30/hr. the next time and so on. Keep inching up until people start telling you no.

When you start getting a bunch of “no’s” go back down to the highest amount you’ve successfully charged. You’ve now found your rate.

If you’re having a hard time securing $20 per hour then you are targeting the wrong people and need to rethink who you want as a client.

(I did this for freelance clients and sponsored posts for my blog. It’s a great way to test the waters.)

Getting Paid Hourly vs. Per Project: Which is Better?

If you can help it, I recommend that you ALWAYS charge per project. (There may be some instances where this doesn’t work out, which is fine.)

There’s one big reason I recommend charging per project: you get better as you go.

For instance, when I first started freelance writing I charged $20 for a 500 word blog post. It took me around an hour to write the post. This means I was grossing $20/hr.

After writing for six months to a year I got into a groove and it took me only 30 to 45 minutes to write that same blog post. I was now earning $30-$40/hr. If I would’ve charged $20 per hour instead of $20 per post there would’ve been no room to earn more.

This room for growth is one reason I absolutely love freelancing.

When I first started freelancing nothing felt more foreign to me than how to set freelance rates. Six years later I've come up with a great strategy to figure out how to get top dollar.

When you work for a regular employer you’re not (often) rewarded for getting better at your job – you’re paid the same hourly rate or salary no matter how much work you get done in a day. It’s not like that with freelancing.

It will definitely take time and lots of work but you’ll eventually get better and faster at whatever you do. This means your hourly rate will go up.

To figure out what to charge per project simply estimate the hours the project will take and multiply it by the hourly rate you’re hoping to get. Sure, the first few times your estimates may be off but you’ll eventually get good at it.

Once you get that amount figured out, never lower it. (You can increase it with new clients or over-time with existing clients though.) You’ll get faster at your projects and you’ll see your hourly rate increase.

Should I Ever Make an Exception When it Comes to Pay?

That’s completely up to you.

I personally will make exceptions if there’s someone I want to work with who I know can’t afford the rate I want or it’s just somebody I really like.

It’s An Experiment

When it comes to freelancing you’re not going to get everything right straight from the start. You’ll have to test the waters a bit. That’s perfectly okay!

The main thing you need to keep in mind is that you are going to be paying your own taxes and any necessary expenses. Be sure to charge enough to cover those items and still be earning enough to reach your goals.

Other posts in this series:

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