What You Should Be Charging as a Freelancer

As a freelancer, chances are you’ll go through phases feeling like you’ve fallen into a pot of gold. You’ll want to shell out your 50-Euro bills like Kim and Kanye . €3.50 for that Americano? Make it 5! Ok, I’m kidding…most of us have a bit more sense than that. Nevertheless, the temptation is there – until the pot runs dry, or you’re faced with a hefty tax advance. Then it’s back to biting your nails and freaking out about where to get the next gig just to pay your bills.

Let’s face it: dry spells and fluctuation are normal. Even after many years as a freelancer, there will be times where you’re making good money and times where you might start doubting whether you’ll ever find work again. This means that figuring out what you should be charging in the first place is a super important step to making or breaking your freelance dream.

As always, you’re not alone in this: we’ve made it our mission to help you cope with the tricky stuff and eliminate a little of the financial angst. In this article you’ll find a method that can help you calculate your rates. It’s a lot of number crunching so bear with us!

Challenges You’ll Face When Working out Your Rate

There are many reasons why you might join the freelance tribe – maybe it’s a desire to turn your passion into a career. Perhaps you can’t wait to be your own boss, accountable only to yourself. Whatever your motivation, when you start out you will probably be filled with unbridled euphoria, a sense of freedom and a willingness to do what it takes to get your business up and running.

A word of caution: with this sense of excitement also comes a responsibility to yourself. It’s oh-so-easy to suddenly work all day every day and compromise on what you’re earning when your job is also your hobby. But are you getting paid for all the extra hours you’re putting in? To make sure you don’t end up burned out and in debt, it’s important to be aware of some of the mistakes you might make when working out your rates.

Lack of Experience

Once upon a time you probably had a regular income delivered directly to your account each month. As an added bonus, your (German) employer took care of all those pesky tax and health insurance deductions. All you had to do was figure out your living costs and whether you could afford that Grecian summer holiday.

With lack of experience and little opportunity for comparison, you might be tempted to simply base your freelancer fee on what you earned as an employee. Your thought pattern might go along the lines of, “I earned €3,000 a month at FullTimeJob, so surely that’s the amount I can expect from freelancing? Oh, and look, this article on Freelancers ‘R’ Us says to take that amount and simply add 20%. Well, that’s easy! What’s all the fuss about?” Please, don’t be fooled by this too-simple-to-be-true approach.

The Economic Calculation

It doesn’t matter whether you’re a developer, a designer, a writer, a photographer or in PR – as a freelancer, you’ll need to train yourself to be economically minded. And this is no easy feat. There will probably be countless occasions in your career where you’re faced with project opportunities that sound really exciting, but, on closer inspection, just don’t make sense financially. Take a step back and really consider whether you can afford to take on a job that doesn’t pay enough to cover your basic needs.

Know Your Worth

It takes balls to charge an hourly rate of €60, €80 or €120. You can’t do this if you don’t believe your work is worth it – it might sound a bit strange, but people can smell that kind of insecurity from a mile off and it will make potential clients wary. Make sure you really own what you’re doing and don’t fall into the trap of selling yourself under value. If you have several years of experience in your field, you shouldn’t be charging the same rate of someone with no experience at all.

The Biggest Mistake Freelancers Make When Calculating Their Hourly Rate

Many online forums and blogs suggest that you simply work out your personal expenses as a basis for calculating your hourly rate, but we disagree.

Consider the following scenario: you’ve just completed your studies and want to start out as a freelance IT-consultant and use your private expenses as the basis for your hourly or daily rate. You’ve managed to get by on €1,000 a month so far and so that’s the amount you use for your calculations.

5 years go by and suddenly you’re married, you have a kid, a car and want to build a house. You’ve decided that your partner will be a stay-at-home parent for a bit and to make this work you’ll need €3,000 a month. But let’s be honest, you can’t suddenly tell your clients that your rates have tripled – when the service you provide stays the same. Yes, of course you may increase your rates based on more experience, but that should be reflected in a gradual increase and not a sudden jump. Increasing your rate based on your personal situation is a big risk – you will most likely lose faithful, long-term clients and it will be very hard to justify. So, what is the alternative?

How to Properly Calculate Your Rate

Let’s work with an example to show you a better way of calculating your rate. When doing this for yourself, simply substitute the relevant figures with your own.

As a starting point, let’s consider the minimum wage in Germany, which is €8.50 an hour (for a 40-hour week that makes €1,473.33 a month) and also the current average wage. According to government statistics (Destatis), full-time employees in the service industry earn €3,970 a month (2nd quarter of 2016). ( Source ). If you were to work 8 hours for 30 days that makes €16.54 an hour. This is, however, not an adequate hourly rate for a freelancer. Why?

Can’t Work, Won’t Work

Even if you start out fuelled by adrenaline and an endless supply of coffee, you won’t be working 24/7 for the majority of the year (or at least we hope that’s not the case!). This means that you need to consider the effect of lost time and non-billable hours when doing your rate calculation.

So, let’s do the maths: a year has 365 days, approx. 52 weeks. That means there are 52 Saturdays and 52 Sundays on which you probably don’t want to work. In addition, there are about 9-16 bank holidays in Germany (depending on where you live). This reduces the number of working days to around 248 (assuming you have 13 bank holidays).

As an employee, you have an additional 25-30 days of paid holiday. As a freelancer, you need to make allowances for this, too, as any break you take will come out of your own pocket.

Next up: sickness. Remember that pesky flu you had last winter that reduced you to a snivelling mess on the sofa for a week? If you’re employed, your employer covers this. As a freelancer, you have to factor this into your calculations. Government statistics estimate that on average approximately 10 days a year are sacrificed to illness. ( Source )

And we haven’t finished just yet: you will probably want to take some time off for further education – for example an online course or even just a day where you take some time out to plan where your freelance business can go next. So, let’s deduct another 5 days for this.

This leaves us with 205 days a year or 17.08 days a month that you can work. If we use the average employee’s wage of €3,970 and divide it by 17.08 we get €29.05 an hour (€3970: 136.64 hours). To help you visualise all these numbers, here’s a little table overview:

So far, so good. This now leaves us with a minimum wage of €10.78 an hour or an hourly average wage of €29.05.

The Difference Between Profit and Turnover

Something all freelancers need to get their head around is the difference between turnover and profit. Your turnover will become profit once you’ve subtracted your expenses.

As an employee, you’re provided with a place to work, probably a nice computer, software and, if relevant, insurances. All this is covered by your employer. As a freelancer, you need to take care of all these aspects – and foot the bill. Depending on what you do, these costs can amount to anywhere between 500 and several thousand Euros. And you also need to factor this into your calculations.

Let’s assume you have monthly expenses €1,000 for things like renting an office space, office materials, travel costs, insurance and marketing. Take a look at how this affects your hourly rate in the table below:

Social Insurance

By now you’re probably scratching your head and wondering: am I done yet? Well, no, not quite. Hang in there, tiger.

When you’re employed, a contribution towards your health, old-age care, pension and unemployment insurance is automatically deducted from your gross wage. Your employer also pays a percentage of the costs, listed in the table below:

When you’re employed, you most likely won’t even know how much your employer is paying towards your insurance, but as a freelancer, you have to take care of all this yourself. Note: For this calculation, we’ve assumed that the freelancer has state healthcare insurance and we’ve removed the unemployment insurance, as freelancers tend not to have this.

Time Stealers

In an ideal world, you would spend 100% of your time on client projects. But reality is different: you suddenly have a lot more things on your plate that need handling, like admin, marketing and client acquisition. How many hours you need to dedicate to this depends on the type of job you do but shouldn’t be neglected in your sums. For the purpose of our calculation, we’ll assume you spend 30% of your time doing things only indirectly linked with the projects:

To summarise: If you, as a freelancer, want to earn in the minimum (really?), then you should be charging €28.60 (net) an hour. If you want to earn the average you should be charging around €60 an hour. This makes it very evident, that projects which offer €20/25 an hour are really not worth taking into consideration. If other freelance competitors offer such negligible rates, they are most likely doing themselves and the industry harm, or don’t have any expenses to speak of.

What About Taxes?

Last but not least, let’s quickly mention how your taxes factor into all this. Value Added Tax or Umsatzsteuer is always calculated separately. Why? Because VAT is added on top of your rates and goes straight to the Finanzamt (for example via your Kontist account) – this means it is “self-balancing”.

You’ll also have to remember to deduct income tax from your earnings. Your income tax is only marginally considered in our calculations but how high it is depends on many factors, including your total annual income, your marital status and whether you have kids, so it’s difficult to provide an accurate example. However, if you want to make sure that you’re putting aside enough money, the Kontist app and your tax advisor can help you.