When you decide to step out on your own and become an independent contractor, one of the biggest headaches you will have to deal with is setting your bill rate. If you charge clients too much, you may lose out on a lot of business opportunities. If you set your hourly rate too low, you may be forced to work too many hours to achieve your desired salary.
Some experts tend to oversimplify this process by recommending that you divide your annual employment salary by 1000 to get your hourly rate. This isn’t a good idea because this method fails to account for several factors such as taxes, healthcare, fees, and etc. The good news is that you can figure out a fair hourly rate as an independent contractor by doing a few calculations.
Here’s what you need to consider:
Set Your Annual Salary
How much do you want to get paid at the end of the year? If you have experience performing the same job as an employee, you can use your previous salary as a guide. Alternatively, you can find out how much other contractors in the same field are earning. Just make sure that the amount you settle on reflects your experience and skills.
Calculate Business Overheads
Your overheads include the costs of operating the business. They include:
- Bank/accounting charges
- Insurance for general contractors
- Office space costs
- And anything else!
Select Your Profit Margin
Once you have determined your annual salary and overheads, you need to choose a profit margin. The profit, unlike the salary, is what you use for expanding and developing your business. Profit must be expressed as a percentage of the cost of a specific job. Though there is no set standard, the common profit margin range is 10 to 20 percent.
Set Your Billable Hours
You need to determine how many hours per year you will be working. A regular year has 52 working weeks (260 work days) but you won’t be working throughout the year. Therefore, subtract at least 20 days to account for holidays or unplanned work breaks. This will give you 48 working weeks (240 working days) a year, which equates to 1920 billable hours. Though you may not use up all 20 days of holiday, it’s better to pick a high number so that you don’t end up underestimating your hourly rate.
Calculate Your Hourly Rate
Now that you have your annual salary, overheads, profit margin, and billable hours, it’s time to determine your hourly rate.
- Add your annual salary to the overhead expenses. For example, $60,000 + $25,000 = $85,000.
- Multiply this total by the profit margin percentage. For example, $85,000 x 10% = $8,500; $85,000+$8,500 = $93,500.
- Now divide this amount by your annual billable hours to get your hourly rate. For example, $93,500÷1920 = $48.69. You can round this off to $49 per hour.
Knowing how much to charge is a matter of determining your annual rate, expenses, profit margin, and billable hours. You may have to do some market research to compare your rate with your competitors. Keep tweaking your rate if necessary until you get the pricing and strategy right.