Freelancers - What Hourly Rate Should You Charge?

There are a lot of assumptions about Freelancers and self-employed people. Some are true - yes the freedom to make the schedule and ‘’choose’’ your clients is great. However, unlike a standard 9 to 5 job where your role is clear and defined, where the organisation you work for scales your salary and aligns it closely with specific experience and also - provides a pathway to earn more, freelancers are left to structure their income themselves as well. The assumption is - this is great, you can really charge what you are worth!

However, clients tend to assume freelancers have a ‘’discounted rate’’ or that their direct rate entitles them to harsh negotiations. Quite simply, this is not the case. For freelancers, in this case, it is very important to know how much you should charge, and why - so you can negotiate your worth. In this article, we are going to take a look at what hourly rate you should be charging.

Excessive back payments to the tax office or the social security agencies are always a blow to the neck and have already destroyed the livelihood of many self-employed. This is not meant to bring up bad memories or give you any sort of anxiety, but to be very realistic about the kinds of struggles freelancers need to be prepared for as they navigate the business world, amongst doing that all important work.

At Kontist we are committed to helping you with this problem and making sure that you can calculate well from the start, so you do not have to experience any nasty surprises at the end of the month or year. In this post, we want to take a closer look at the fee this time and calculate by way of example how much you should earn as a freelancer.

Why it's so hard to ask for an appropriate hourly rate

Many freelancers start to earn money with their passion. You no longer have a boss, you're free and you're making money with a job that's fun for you. This is an excellent situation and many founders start euphorically in the project of self-employment.

It is also easy to fall into the trap of offering your work passionately in the beginning, at ‘’mates rates’’ or often, for free - in the hope it leads to more work. The line between work and leisure increasingly blurs and it is difficult to draw a line between work and hobby and between "billable" and "not billable".

Truthfully, everything SHOULD be billable when it comes to clients or work. Why? Well, you never see a REWE employee showing up for free to make a good impression or show off their skills. This is business, and this is your business.

Business calculation

As a self-employed, you need a reasonable business calculation. Even if you are a developer, designer, copywriter, photographer or PR consultant, it is important that you do not ignore the business basics. An assignment can be so interesting and attractive but it is neither if it does not cover your costs. You are not required to make up poorly set budgets of the people you are working for.

Experience

What you earned as an employee for the work you do as a freelancer needs to be addressed seriously and wholly, and a premium needs to be added to this amount. So, when you are researching your salary equivalent online, make sure you begin with accounting for a premium. Remember, you are responsible for your health insurance, all other insurance, all your pre-payments and social contributions - and that all adds up!

You are worth the money you ask for

Many young freelancers break in the fee negotiation and sell themselves under value. You, yourself, may not be used to seeing the actual figure required for you to succeed in your business.

It could be 3 x what you were earning as an employee and in the beginning phases especially, with aspersions over your experience and diversity of deliverables, you may really struggle to commit to the amount you have calculated. But, you are worth the money you ask for, especially if it is a well thought out and calculated amount.

The biggest hourly rate error

In many guidebooks and freelance portals, it is proposed to take personal costs as the basis for the fee calculation. But we strongly advise against that. In a salary negotiation with your boss, you would not list your new car and house building as reasons for a salary increase ... Your boss and your client do not care what you do with your money. And, neither should your clients.

Take this idea: you become self-employed after finishing your studies and you begin by calculating your personal costs. It is highly unlikely that these costs remain the same over, let’s say, the next three to six years of business. Like any costs, these will inflate and your personal circumstances will change.

So you have to accommodate for that? Will it be so easy to ask your customers for more money for the same work, just because your needs have changed? Well, no. It is better to start with a realistic plan that accounts for the long term.

Calculation of the hourly rate as a freelancer

Let’s start getting a basic understanding of hourly rate calculations. This was dutifully handled in the German version of the Kontist blog , but of course, expats need this information as well. Let’s start with a basic concept.

As a calculation basis, we take the legal minimum wage of 8.50 EUR per hour (equivalent to a 40-hour week 1,473.33 EUR / month) and the current average salary of Germans. According to the Federal Statistical Office (Destatis), full-time employees in the service sector earn EUR 3,970.00 per month (Q2 2016) (Source: Fachserie 16 Reihe 2.1). That would be at 30 days / 8 hours / 16.54 EUR per hour. But, as we all know, that is not an appropriate hourly rate for the self-employed. But, even some freelancer are barely charging this! So, let’s go a little deeper here.

Non-working days

You do not work every day (but if you are, see our article on life-work balance !). Even if you work at the beginning of your self-employment sometimes even on the weekend and do not go on vacation, so you should consider these free times in your calculation without compromise.

One calendar year has 365 days, which is about 52 weeks. So there are 52 Saturdays and 52 Sundays that are not worked on. Depending on the state and year, there are 9 to 16 public holidays. So the year has only 248 working days (13 holidays). It is indeed strange that we do not calculate our hours or fees like this, but again, we are not calculating for when we are simply alive and living - we are accounting for our working time.

Employees also have 25 to 30 days of paid vacation that freelancers have to earn in their working hours (we expect 28 days). Many of you maybe are not in this position, but wouldn’t you like to be?

In addition, employees also get paid the days in which they are sick in bed and can not work. This is usually not the case for the self-employed. According to the Federal Statistical Office, the sick leave is currently 10.0 working days per year.

Now you will indeed have sick days unless you are super-human, just remember, the German winters are brutal! Effective work is thus only on 205 days per year (17,08 days/month) The average salary of 3,970.00 EUR is thus earned on 17.08 days. We arrive at an average hourly rate of employees of 29.05 EUR (3,970.00 EUR: 136.64 hours).

Social insurance

Have we already considered social security here? Since we use the employee gross salary as a basis for calculation, we have already taken into account a part of the social insurance. Employees have their contribution deducted from the salary in addition to the tax but also the contributions to health insurance, long-term care insurance, pension insurance and unemployment insurance.

In the end, you only get paid the net salary. Employees never get to see much of their social security contributions. But every employer has to pay an employee's social security contribution for his employees. Surprise, though, you have to take care of yours.

The following contributions are important for this calculation:

Each employer pays these contributions to his employees without them noticing. Since freelancers have no employer, we must also pay from our own pocket.

Unproductive time

Can you really charge 100% of your time or do you often work without being able to bill someone?

Every freelancer also has unproductive times when it comes to accounting, customer acquisition and office organization. How extensive this work actually is, depends very much on your job and your customers. If you are a programmer and have been booked for 12 months for a project, you will probably have up to 95% productive time to settle.

However, if you work as a consultant and are always dependent on new customers (example: wedding planner), the productive/billable time can be significantly lower, as you have to regularly take care of the customer acquisition. This is a huge factor that cannot be ignored - all of those emails, all of those items.

In our calculation example, we calculate with 30% unproductive (not billable) time. Again, really think hard about your unproductive time and be realistic.

Let's sum up the results: if you want to earn the minimum wage as a freelancer, then you should calculate 28.60 EUR per hour. If you want to earn an average salary, you should ask about 60.00 EUR per hour.

This quickly makes it clear that you should not deal with orders for which you would get 20.00 EUR or 25.00 EUR per hour. All competitors who advertise with such prices are sustainable, live below the subsistence level or have significantly lower fixed costs - or not providing a quality service.

Where is the profit?

We did not take any profit into the calculation. As a self-employed person, however, you carry a significantly higher risk than employees. For example, what do you do if you get sick for more than 10 days? Or what happens if you have a backlog of orders and you do not find enough customers?

All these risks should also be reflected in your income and thus in the hourly rate. How much you can beat the calculated hourly rate as a profit depends entirely on how the competition is, how well you can negotiate, and how big the benefit the customer sees in your job.

But what about the taxes?

Are you wondering now how the taxes are playing a role here? That is unavoidable. Sales tax is excluded from this invoice. Why? Because generally always only with net prices should be calculated. The sales tax is then added to the calculated hourly rates and paid to the tax office. Remember, tax money is not your money, and therefore you should not calculate with it. Income tax is only approximated in this calculation.

We took the gross salary as the basis for calculation. From this amount, workers have to pay their income tax, as it applies to the self-employed. Since the individual tax rate depends very much on the total income, marital status, possible children and insurances, etc., it is, therefore, difficult to consider an individual tax rate for such an exemplary calculation.

Kontist integrates intelligent financial management in addition to the normal functions of a business bank account. In addition to classic bank transactions (such as transfers/standing orders), you have the ability to categorize your transactions, integrate your accounting, calculate your taxes and manage them. And of course, you always have 100% transparency over all your spending and revenue.

This is a huge relief to your taxes and prepayments. Why? After you have categorized a receipt of payment, the income and sales taxes of the transfer are automatically moved to virtual sub-accounts. These sub-accounts are your cushion for payments to the tax office.

So you always have a good overview of the sums that you still have to pay as a tax payment. The huge surprise if the letter from the tax office will not be getting you. So you're always aware of what money is really "yours" and which you better should not touch.

Are you surprised by how much you should really be charging? Probably, many fresh freelancers are. But, know you are worth it because your life and business demand it. Your work will speak for itself, so, run through these exercises and get a clear idea of what you should charge for your hourly rate!