Setting a freelance rate so the work actually pays

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.