How to figure out your required hourly rate — and then hide it

It is one of the core principles of freelancing that it’s generally better to seek flat rates than hourly rates when pricing your work. Unless you work very slowly or the project is not what it at first appears, flat rates will likely end up allowing you to make more money.

In fact, if you do things right, setting flat rates can allow you to make a lot of money.

Understanding the hidden hourly rate

Just because you’re not quoting an hourly rate to the client, however, does not mean that you aren’t thinking about how much you are making per hour. You should always have a baseline hourly earning goal in mind — just don’t share it with your client.

Identifying a hidden hourly rate is one way to help simplify the complex art of pricing your work.

After all, one reason people sometimes resist moving away from hourly rates is that hourly rates make things straightforward. You can ask for the same thing from every client and not worry any more about pricing.

But if you are setting flat rates, you may have to figure out a new rate for every single project since each project may be different than the last. The need to constantly come up with new pricing can feel stressful and exhausting, especially if you have issues surrounding money or self-confidence.

And I’d be lying if I said that flat-rate pricing is ever simple or easy. Even veteran freelancers who have been doing this for years approach pricing with a large degree of uncertainty and guesswork.

That’s the nature of the game if you’re trying to price as high as you are able; it’s a matter of becoming more practiced at it and more confident in your own understanding of what your work is worth.

One key factor in figuring out what to ask for in flat rates is what you want to make — at minimum — per hour. Don’t think of this as your “hourly rate”; it’s more of a baseline that you can keep in mind to get a ballpark price to start from.

For example, say a client wants you to write a 15-page e-book. After asking many specific questions about the project, you estimate that this will take you 40 hours. If your baseline is $100/hour, then you should charge a minimum of $4,000.

The key word there is minimum. The goal is to feel out what the client is willing to pay; if you don’t get negotiated down some of the time, you’re asking for too little. E-books are major value producers for companies, so clients are typically willing to invest a good chunk of money in creating them.

You can base what you ask for on various factors, but chances are you should be asking for more — probably much more — than $4,000 for a piece of work that large and valuable.

Finding your minimum hourly baseline

Figuring out your minimum hourly baseline is a matter of setting goals and then working backwards. First set a realistic goal for how much money you want to make in a year. Remember that you’ll be responsible for paying taxes, so this figure should be pre-tax.

If you don’t know what annual pre-tax salary you’d like (or is realistic) but you do know your expenses each month, add up how much after-tax money you need or want each month then multiply that by 12 to get a yearly after-tax goal.

Figuring out your pre-tax goal from this amount isn’t an exact science since it’s hard to tell exactly how much you’ll owe in taxes. But one fairly reliable method is to multiply the after-tax goal amount by 0.43, then add the resulting amount to the after-tax figure. This will give you your approximate pre-tax annual goal.

For the sake of our example, let’s say you want to make $5,000 after taxes every month, which translates into $60,000/year net.

$60,000 x 0.43 = $25,800 in taxes
$60,000 + $25,800 = $85,800 pre-tax

Round that up to $86,000 for a streamlined annual gross earnings goal.

Now you need to figure out how many hours you want to or are able to work.

Remember that “work” in this case means billable hours. Many things that take up freelancers’ time are administrative tasks that aren’t billable hours — things like filing, invoicing, marketing, etc. These hours must be accounted for and do not count toward your annual pre-tax goal.

The need to incorporate these non-billable tasks — as well as the need to pay for benefits, vacation, sick days, and retirement — is the reason freelance hourly pay rates can seem so high to full-time employees who are used to these costs being borne by their employers.

So to figure out your billable hours, look at how many hours you can work every day. Leave time for those nonbillable tasks. And be honest with yourself about how many hours you can actually spend doing billable work without burning out. This is probably fewer hours than you believe, at least for some freelance jobs.

Say you end up with the conclusion that you can do five billable hours a day five days a week. Next figure out how many vacation and/or sick days you’re likely to want to take during the year. It can be useful to settle on a round number, such as four weeks. Reduce that number of weeks from the 52 weeks in a year. If you want to take four non-working weeks a year, that means you have 48 working weeks.

If you anticipate billing work five hours a day five days a week for 48 weeks a year, your total billable hours for the year will be 1,200. Now calculate how much you’ll need to make per hour to reach your annual earning goal in this amount of time:

$86,000/1,200 = $71.67

Rounding up gives you $72/hour as your minimum baseline hourly earnings goal.

Translating your hourly goal into flat rates

When someone asks you to quote a price for a job that seems like it will take five hours, you can now know that you should quote at least $360 flat rate for the work. (But of course quote higher than that if you feel you can!)

If you compromise and accept work that results in pay below this rate, you can now be certain that you won’t be able to reach your annual goal unless you (a) work more hours than you had intended over the course of the year, or (b) find other work that earns you more than your goal per hour to make up for the shortfall.

Perhaps that kind of compromise will be worth it you at various times and for various reasons — you need money fast, for example, or you want to do low-priced work for a charity you believe in. And that’s fine.

But it’s important when accepting such work to know what it means for your ability to reach the goals you’ve set.

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