How to calculate your hourly rate as an independent contractor (with calculator)
If you’re an experienced independent contractor, you’ll know that calculating your hourly rate isn’t as simple as basing it on the salary of a full-time employee. The services you provide are your “products” and should be priced appropriately based on your experience and expertise. But there are several factors to take into account that contribute to the final price that you’ll charge your clients.
In this post, we explain factors that influence your rates, go through the step-by-step process of calculating your price. Depending on local conventions, you may need a daily rate instead of the hourly rate example described in this blog post. Fret not — we’ve included a calculator that you can use to determine your hourly, weekly, and daily rates at the end of the post.
What to consider when setting your contractor rate
As an independent consultant, you’ll enjoy a ton of benefits that you don’t get as a permanent employee. You’ll have more flexibility because you can choose how many hours you’d like to work in a year and the freedom to choose the projects you’d like to work on.
However, you’ll no longer be eligible for the same benefits as permanent employees. You are responsible for self-employment tax, contracts, benefits, and vacations. Telephone bills, office equipment, insurance, and admin costs will need to be factored into your rate.
Your hourly rate is also based on how much time you’ll be working. So you’ll need to exclude vacation days, sick leave, and statutory holidays from your calculations.
You’ll also need to consider the possibility of unplanned breaks between jobs. You won’t be billing a client to make up for downtimes, but you will need to adjust your billable hours to come up with a fair hourly rate.
Steps to calculating your hourly rate
Step 1: Use an annual salary as a base rate
Annual salaries are often reflective of industry rates and take into account skills and experience.
You can use your most recent annual salary as a base rate. But if you’ve upgraded your skills since then, or if you think you weren’t getting what you deserved, do quick market research to find out what someone with your expertise and experience would be paid.
Websites like Salary.com, Glassdoor, and PayScale have gathered data that will tell you what your peers are earning, and some job postings will include salary ranges. You could also refer to annual salary reports, guides, and surveys, all of which provide benchmarks for employees and employers alike.
Step 2: Add employee benefits
Annual salaries don’t include full-time employee benefits paid by employers — such as paid vacation leave, health insurance, social security, or a pension plan. Include these in your rate calculation as you’ll now need to cover these expenses yourself.
So far, your annual salary calculation looks like this (all amounts are annual totals):
Base salary: EUR 80,000
Annual health insurance: EUR 8,000
Employer contribution to pension plan: EUR 8,000
Other expenses (e.g. allowances): EUR 500
Total annual salary = Base salary + Health insurance + Employer contribution to pension plan + Other benefits.
So your total annual salary at this point = EUR 80,000 + EUR 8,000 + EUR 8,000 + EUR 500 = EUR 96,500.
Step 3: Include overhead costs
Overhead costs, or business expenses, include a desk or office rent, IT equipment or specialist software, marketing costs for your services, internet connection, office supplies, business insurance, and administration costs for your business.
If you work remotely from a home office, include the cost of the increase in your energy bills as a result of working from home. If you work onsite most of the time, then only add rent costs when it’s relevant. And of course, if you work onsite all of the time, there is no need to include this cost in your calculations.
Make a list of your operational necessities and a rough estimate of how much they would cost in a year.
For example:
Office rent = EUR 350 x 12 months = EUR 4200 per year
Yearly software licensing = EUR 100
Internet connection = EUR 45 x 12 months = EUR 540
Business insurance = EUR 60 x 12 months = EUR 720
Accounting fees = EUR 400
Which brings your total annual overhead costs to EUR 5,560.
Your target annual salary is now EUR 102,060.
Step 4: Add a profit margin
Now that you’re an independent consultant, you’re entitled to a profit margin, just like any other company or business.
Profit margins are a reward for taking the risk of running your own business. It’s what you get on top of the cost of your services and business expenses. Profits are generally invested in activities or expenses that aim to increase the value of your business. It can include anything from software upgrades, upskilling courses for yourself, marketing costs, or anything else that helps your business grow.
Profit margins vary from industry to industry but the average is around 20%.
After adding that to your target annual salary, your annual rate is now at EUR 122,472.
Step 5: Determine your billable hours per week
Now that you’ve got your annual rate, it’s time to convert that into your hourly rate.
Determine the number of hours you’d like to work in a year. Let’s say you’d like to work for 35 hours a week for 47 weeks per year after deducting time for vacations and unplanned leave.
47 weeks x 35 hours = 1645 hours/year.
Your hourly rate would then be EUR 122,472 ÷ 1,645 hours = about EUR 75 per hour.
Step 6: Check out your competition
Before jumping in with your hourly rate, it’s worth checking out what others in your field are charging for their services. This is an important step to make sure that your rates are realistic and competitive.
You can check your rate against what employers are offering independent contractors on job ads, what other professionals in your field are charging, or perform some online research on the going rate for contract work for your line of work.
Remember to compare your hourly rate with other independent contractors in the same industry, level of experience, and expertise.
In your research, expect to occasionally find a much higher hourly rate compared to the average. This is usually due to the added value from the hired individual.
For example, are you providing niche services that are harder to find? Do you have additional certifications and awards that bring value to assignment outcomes? Are you particularly known for your adaptability, strong problem-solving skills, or quick turn-around times?
All these factors can enhance your hourly rate. If you’ve established a reputation for additional contributions that produce outstanding results, employers will be willing to pay more.
Bonus tip: Regularly review your rates
When you’re just beginning, you may be able to gauge if your hourly rate is right based on the response and feedback from clients. Charging too low for the work you provide may result in you being taken advantage of. Charging too high will turn potential employers off.
Once you feel you have the right balance, you’ll still need to review your hourly rate regularly to stay competitive and keep your business profitable.
Good reasons to raise your hourly rate can be in response to the following:
- You’ve gained additional skills that increase the value of your delivery outcomes. Higher quality work should always be rewarded with higher fees.
- The scope of your work has expanded beyond the initial agreement with your client. For example, you now have the responsibility of preparing weekly analytic reports for your client.
- The demand for your services has increased. If more clients are seeking you out compared to your competitors, it’s a good sign that you need to raise your rates.
Keep up with the economic and legislative developments in your own country. Taxes, mandatory employer contributions, and other policies may require you to adjust your rates.
Bonus tool: The Onsiter Hourly, Daily, and Weekly Calculator for Independent Contractors
As promised, here’s our calculator for finding out what you could charge your clients.
Simply type in the charges you would like to include, and the calculator will automatically work out your hourly, daily, and weekly rates as an independent consultant
IMPORTANT: This link opens ‘View only’ version of the calculator. To use the calculator, click ‘File’ > ‘Make a copy’ or ‘Download’. You’ll need to be logged in to a Google account to make a copy or download it.
