Setting a freelance rate so the work actually pays

Most freelancers set their rate by looking at what other people charge and picking a number near the middle. That method has one advantage — it is fast — and one defect: the other people may also have guessed. A rate that pays your bills and funds a pension is a calculation with about six inputs, and none of them is what the competition charges.

The end of the calculation is not a comfortable number. Somebody billing €62.50 an hour sounds well paid. Somebody billing €62.50 an hour who can only bill for 58% of their working time, and who pays their own health insurance and pension out of the same pot, is earning roughly what a mid-level employee earns — with none of the employee's protections.

The three sentences that set a rate

Almost every rate-setting problem collapses into three questions. What do I need to take home? What does it cost to run this business? How many hours can I actually bill?

Answer those and the rate stops being an opinion. Here is a worked example for a freelance designer or developer in Germany:

• Target net income: €40,000 a year. What you pay yourself, after tax, before personal savings.
• Business costs: €6,000 a year. Software, hardware depreciation, insurance, accounting, a workspace contribution, professional development.
• Billable hours: 1,200 a year. The number almost everybody overestimates.

The middle step is the one people skip. Income tax, health and care insurance, and pension contributions all come out of the gross profit before you see anything, and they add up to roughly half of it at German rates. To end up with €40,000 net, you need something close to €75,000 of client revenue.

Now the division that looks trivial and is not: €75,000 divided by 1,200 billable hours is €62.50. If you had assumed you could bill 1,800 hours — a common assumption, and 35 hours a week of pure client work — the same revenue needs only €41.67 an hour. Same money, wildly different rate. Everything depends on getting the hours right.

Where the working year goes

A year has about 2,070 working hours once holidays, public holidays and a realistic allowance for sickness are removed. Of those, 1,200 are billable. The other 870 hours are as much part of the job as the client work:

• Sales and proposals — 250 hours. Writing quotes, calls, follow-ups. Unpaid, unavoidable.
• Admin and finance — 180 hours. Invoicing, chasing late payments, bookkeeping, tax paperwork.
• Learning and product work — 200 hours. Keeping a skill sellable. A rate built on last year's skills decays.
• The rest — 240 hours. Correspondence, meetings that go nowhere, the client who books a slot and cancels.

An 870-hour overhead on 1,200 billable hours is a 72% markup on time before a single euro of tax or insurance. That is the real reason freelance rates look high to clients and feel low to freelancers. Both sides are looking at different denominators.

Where the €75,000 goes

The rate is only a means. What matters is the distance between client revenue and money you can actually keep, and most of it never arrives.

From €75,000 of client revenue, the business pays €6,000 of running costs and leaves €69,000 of profit. Income tax takes about €20,000. Health and care insurance takes about €8,500. Pension contributions — the part that replaces an employer's scheme — take about €6,000. What remains, taxable-free and clear, is around €34,500 for the year.

Hold that next to the employee comparison. A mid-level employee on a similar total package has an employer paying half the social contributions, paid sick leave, and a pension contribution that is not optional. The freelancer has a rate and a calculator. The gap is not a reason to avoid freelancing. It is a reason to stop comparing a client rate with a gross salary, because the two numbers are not the same kind of number.

The same revenue split as shares, which is how it feels from the inside: