Calculating your billable hourly rate is essential for freelancers, consultants, and service-based businesses. This is a quick and dirty formula to determine your billable hourly rate. If you want to dive deeper into my thoughts on how I calculate my rates, check out my post on How to determine your shop rate and day rate.
- Determine Your Desired Annual Income: Start by deciding how much you want to earn annually. Consider your financial goals, living expenses, business expenses, taxes, and any other financial commitments. Be realistic about your income expectations.
- Account for Non-Billable Hours: Not all your working hours will be billable. You’ll need to account for non-billable hours such as administrative tasks, marketing, client meetings, and professional development. Typically, these non-billable hours can range from 20-30% of your total working hours. Subtract this from the total number of hours you plan to work in a year.
- Calculate Your Overhead Costs: Determine your annual business expenses, including rent, utilities, insurance, software subscriptions, equipment, and other overhead costs. Divide this total by the number of billable hours you have left after accounting for non-billable hours. This gives you your overhead cost per billable hour.
- Factor in Taxes: Calculate the estimated taxes you’ll need to pay on your income. Self-employed individuals often have to pay both income tax and self-employment tax (Social Security and Medicare). The tax rate can vary depending on your location and income level. Divide your estimated annual tax liability by the number of billable hours to find your tax cost per hour.
- Add Profit Margin: It’s important to include a profit margin in your billable rate to ensure your business remains sustainable and allows for future growth. A common profit margin is around 15-20% of your total costs (billable hours + overhead + taxes). Divide your desired profit margin by the number of billable hours to get your profit margin per hour.
- Calculate Your Billable Hourly Rate: Add your overhead cost per hour, tax cost per hour, and profit margin per hour to determine your total hourly rate. Billable Hourly Rate = Overhead Cost Per Hour + Tax Cost Per Hour + Profit Margin Per Hour
Here’s a simplified example:
Desired annual income: $60,000 Non-billable hours: 20% Overhead costs: $10,000 Estimated taxes: $8,000 Desired profit margin: 15%
- Total billable hours in a year = 2080 hours (40 hours/week * 52 weeks)
- Billable hourly rate = ($10,000 / 0.8 + $8,000 / 2080 + $60,000 / 2080) * 1.15 = $60/hour
This is a basic method to calculate your billable hourly rate. Adjustments may be necessary based on market rates, your industry, experience, and the perceived value of your services. Regularly review and adjust your rate as your financial situation and business needs change.