How To Set Your Rate If You're Self Employed

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If you're self-employed one of the most challenging things to establish is how much you expect to be paid for a given task. There are lots of variables to consider but the key is to ensure you charge clients enough so that, even when you're busy, you don't end up in the position where you can't make enough money to get by. Here's what I did to establish my minimum pay-rates.

You set your value

There's a great scene in the second movie of Christoper Nolan's Batman trilogy, The Dark knight. In that scene, the Joker says:

If you're good at something, don't do it for free.

When you offer services for free, other than in a few exceptional circumstances, you are telling the world your work has no value. There will be times when a prospective client, particularly one that has a large profile in your chosen industry, will tell you that the exposure will be great for your career or business.

People die from exposure!

Set a value for your work that is commensurate with the market and that lets you pay your bills.

As far as doing the odd freebie - I'd suggest it's OK to offer your professional skills to charitable organisations you believe in but I don't think there's anything wrong with issuing an invoice and donating the fee straight back to the organisation.

How much work can you do?

Many self-employed people assume that they'll be able to do paying work almost all the time. Aside from being a recipe for burn-out, the reality is there will be peaks and troughs on your workload. For me, the period between Christmas and mid-January is quiet and I've had a the odd year where there's been almost no work available for all of January.

You need to factor in quieter times, sick days, some holidays and admin time. Then there are public holidays, weekends and other potential interruptions.

If we start with a full 365 day year, I think you need to subtract the following.

  • Weekends: 104 days
  • Personal leave (sick days, family leave, etc): 10 days
  • Public holidays: 10 days
  • Annual leave: 20 days

That's a total of 144 non-working days per 365 day year, leaving you with 221 potential working days.

Then you'll need time for answering calls and email, invoicing, chasing creditors, completing your tax paperwork, marketing, maintaining your website and other administrative tasks.

You may be tempted to do those outside normal working hours but it's important to maintain a healthy work/life balance. I'd suggest doing these regular tasks, whenever you can, during normal work hours. My experience suggests you spend about 20% of your time on non-billable work.

So, that leaves you with about 177 available working days.

What's the least you should charge?

if you've got a good handle on your expenses then you'll know what sort of salary you need to pay yourself to get by.

Let's say you want to earn the average weekly Australian wage. That's almost $61,000 per year.

That means you need to pay yourself $345 per working day.

But, on top of that, you'll have your business expenses. Things like rent, office supplies, communications bills, your computer, smartphone, tablet, tools and other equipment all need to be purchased, maintained and replaced when required. So, you'll need to factor that in.

Although you might be self-employed, you'll want to pay into a superannuation fund as well.

So, you'll need to do the maths on those items and add them to your daily rate, just to make ends meet.

By my estimate, even for a home based worker, you'll need at least another $50 per day. So, just to ensure there's a little bit of margin, $420 per working day, or $52.50 per hour, is probably a good number to look at in order to ensure you don't go backwards.

But remember, that's for an Australian average salary. If you're looking to do a little better than that, you'll need to bump that number up.

Don't forget the market you're in

The thing that's harder to estimate is how the market value your work. There's a delicate balance to ensure you get enough work at a decent rate without pricing yourself out of the market. You may calculate that you need to charge clients $700 per day but if the market won't pay more than $500 you may need to either adjust your expectations or look at alternative forms of income.

While it's good to be always working, it's also important to not set a rate that's too low. You may be able to get buy if you have a frugal lifestyle, by setting the value for the work you do at a low rate, but that may set an expectation that will reflect on other practitioners in your area of expertise.

For example, in the late 1990s, I worked for a company that used lots of contractors. At the time, the going rate was $300 per day. But we had one guy who was happy to charge $180 per day. Unsurprisingly, he was the contractor most called on and it put downward pressure on others to drop their rates to get more work.

There may be situations where coming in low to get some work is actually bad for your industry.

Negotiating up is hard

In my experience, it is a practical impossibility to get a client to increase what they're offering to pay upwards. I prefer to go in with a quote for work that is at the higher end of what I think they'll pay. If they disagree, you can always come down.

I have a standard rate card that covers most of the types of work I do. Whenever someone asks me how much I charge for a given task, I can send them the card and note that there's room to negotiate. In over a decade of self-employment I cannot recall a single time when a client said they wanted to pay more.


Comments

    I don't think there's anything wrong with issuing an invoice and donating the fee straight back to the organisation.

    Invoicing and donating back has more benefits than the author realises because it becomes a tax deduction. If you do the work for free, you may find the ATO has a say about it as well, and deem you to have earned the income regardless. There are all sorts of weird rules around that sort of thing, and they can catch you out to serious effect.

      I did realise but chose to keep things simple and avoid getting into tax rules.

        All good, just thought I'd toss it in there. Deeming rules can do some weird things, so I just thought it was something to add.

        And assumed the article was just some repost from somewhere else :)

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