How to Calculate Your Freelance Rate
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There are various ways people can afford to travel the world non-stop. One being, working remotely as a freelancer, which is a common way digital nomads start out. It's also a common way for digital nomads to earn money. So, how much should you charge for your freelance rate?
Below I explore all the elements you need to take into consideration when calculating your freelance rate, along with how you can calculate it.
Before we get started, I highly recommend downloading the worksheet, as it is easier to digest and calculate all elements. I've attached a screenshot below so you can get an idea of what it looks like and how it works. You only need to enter a few values and your new freelance rate will be automatically calculated.
To begin, the general formula for calculating your freelance rate is as follows:
Take your existing annual salary + annual expenses / number of working days / number of hours worked per day = your hourly freelance rate
Now, let's dive into each element so you can understand how to calculate your freelance rate.
Determine Your Existing Hourly Rate Based on Your Income
Look at your existing income, and put that into an hourly rate. Note: there are 52 working weeks in a year. There is typically 40 hour work weeks (that includes lunch).
For example, if Joe makes $50,000 a year/ 52 weeks (in a working year) /40 hours a week (hours worked per week) = $24.04/hour. Let's round that to $24/hour for simplicity sake. Now we have determined an hourly rate based on our salary, however, there are a series of other costs we will need to factor into our hourly rate. Let's look at each one individually below.
Vacation Time
As a freelancer, you don't get paid for vacation time. So, how much paid vacation time are you expecting? Take the number of vacation days you want, multiply that by the hours you work per day and multiply that by your hourly rate. That puts a "price" on you vacation time. Once you determine this number, you will need to add it to you
Example: Vacation Time
Joe wants 4 weeks holiday, which is 20 days.
20 (vacation days) * 7 (work hours/day) * $25 (hourly rate) = $3,500.
> >Vacation time = $3,500. We will need to add this costs to our final rate.
Sick and Personal Days
How many sick days do you currently get/ how much sick/personal days do you want? Most companies typically offer 5 sick days, so for our example, we will use 5. This worst mistake I made as a freelancer was not accounting for sick days. This means when I sick for a week in Japan, with essentially everything wrong with me, I lost money that month.
Example: Sick/Personal Days
5 (sick days) * 7 (work hours per day) * $25 (hourly rate) = $875
>>Sick and Personal Days = $875
Health Coverage and Benefits
If you have a job with benefits now, you'll want to make sure you're covered as a freelancer as well. You can either consider the monthly cost of third party coverage plus the additional cost to cover expenses. Ie. If a third party covers you for 75% of eye exams, you will need to factor in the additional 25% that you will have to pay. Or say your coverage includes the cost of an eye exam but not the cost of glasses, you then may need to factor in $400/year for glasses or contacts.
Alternatively, you can just look at your anticipated costs of coverage if you were to pay out of pocket and add that. You can find this out by looking at your existing benefits plan and see how much you submitted/how much was covered in your last year. Think about what you will need covered, this could include:
- Orthopaedics
- Counselling
- Prescription Medication
- Dentist (cavities, braces, root canals, cleanings, fillings, x rays)
- Naturopath
- Doctor
- Eye Doctor (eye exam, contacts, glasses)
- Massage
- Chiropractic
It really depends what you need and how much you think you will use it. Don't forget about emergency situations. I am not too concerned here in Canada as costs of major surgeries etc are covered but if you are American, it may be wise to get third party coverage to ensure you are covered in the event of an emergency.
Example: Health Coverage and Benefits
Option 1: Third Party
$300 (Monthly cost of coverage from a third party) * 12 (months in a year) + $1,000 (additional costs) = $4,600.
Note: We will go with this option for the purpose of our example.
Option 2: Out of Pocket/Paying Directly
Health Coverage and Benefits = $3,000
>>Health Coverage = $4,600
Life Insurance
To me, this is an absolute must and doesn't cost too much. You're looking at about $15/month or $200 annually for $200,000 in coverage in Canada.
Example: Life Insurance
Simply Google, "cost of life insurance coverage in ______" and you should easily be able to get a custom quote in seconds, or find rates. For the purpose of our example, let's use the rate I pulled from CAA/Manulife.
>> Life Insurance = $200
Equipment: Tools & Technology
Think about what tools and technology you need to complete your work. How often will they need to be replaced? Remember, you won't need a new laptop every year, so think how long it will last and put that into an annual amount. Some items you may need to cover the cost for include:
- Video or photo editing software
- Microsoft Office
- Chargers (replacement chargers)
- Cell phone
- Cell phone plan
- VPN
- Wireless Mouse
- Keyboard
- Monitor
- Noise canceling headphones
- Laptop
Example: Equipment: Tools and Technology
VPN: $50/year
Wireless Mouse: $100/ 5 (anticipated years of use) = $20/ year
Keyboard: $100/ 5 (anticipated years of use) = $20/ year
Noise canceling headphones = $300 / 3 (anticipated years of use) = $100/ yea
Laptop = $1,500/ 4 (anticipated years of use) = $375/ year
Cell phone $1000/ 3 (anticipated years of use) = $333/ year
Cell phone plan = $100/month X 12 months = $1,200/ year
>> Equipment: Tools and Technology = $2,048
Workspace
You'll need somewhere to work. To calculate this price I use either a coffee shop at a rate of $10/day or a co-working space at a rate of $200/month. Note: $200 a month is pretty typical and costs can go upwards depending on if you want a dedicated desk or office.
Example: Coffee Shop
Option 1: Coffee Shop
$10/day * 23 (max. working days per month) * 12 months = $2,760.
Note: I usually spend about $5/coffee shop at 2 coffee shops a day or 1 coffee shop with the purchase of a snack as well.
Option 2: Co-working Space
$200/month * 12 (months per year) = $2,400
>> Workspace = $2,400. Note: We've use the cost of the co-working space.
Income Tax
Depending on where you pay taxes you are likely looking paying 30% of your income to taxes. Now, your existing salary has taxes taken off as well, but in this case, we will add it so you can see how it can factor in.
Example: Income Tax
$50,000 (Salary) * 30% (tax rate) = $15,000 (Income Tax to be Paid Each Year)
>> Income Tax = $15,000
Cost of Doing Business
There are other small costs associated with doing business that you will want to include some examples are:
- Payment/Paypal fees. Upwork, PayPal, and Transferwise all charge fees when accepting payment
- Accountant
- Website/Marketing
- Invoicing/Accounting Software
Example: Cost of Doing Business
[$100/month (Marketing) + $100 in (PayPal fees)] * 12 + $100/year (Accountant) = $2,500
>> Cost of Doing Business = $2,500
Time Spent "Finding" New Clients
As a freelancer, in the perfect world, clients would come flowing in. However, when starting out, you're going to have to invest some time into finding new clients. Since freelancing usually consists of one-off projects (unless you land a retainer with a client), you'll need to invest time into finding new clients. It takes time to have introductory calls, and connect with potential clients. Set aside some time each month dedicated to "finding" or onboarding new clients.
Example: Time Spent Finding New Clients
15 (Hours Per Month Spent Finding New Clients) * 24 (hourly rate) * 12 (months in the year) = $4,320 (cost of finding new clients)
>> Cost of Finding New Clients = $4,320
Add Additional Costs
Vacation Time + Sick and Personal Days + Health Coverage and Benefits + Life Insurance + Equipment: Tools & Technology + Workspace+ Income Tax + Cost of Doing Business = Additional Costs
Example: Add All Additional Costs for a Final Total
>>Vacation time = $3,500
>>Sick and Personal Days = $875
>>Health Coverage = $4,600
>> Life Insurance = $200
>> Equipment: Tools and Technology = $2,048
>> Workspace = $2,400
>> Income Tax = $15,000
>> Cost of Doing Business = $2,500
>> Cost of Finding New Clients = $4,320
Total Additional Costs = $33,603
Calculating Your Freelance Rate
Take your existing annual salary + annual expenses / number of working days / work hours per day = your hourly freelance rate
$50,000 + $33,603 = $83,603 (new annual salary) /260 (working days per year) / 8 (work hours a day) = $40.19
Our existing hourly rate was $24/hour. Now, accounting for additional costs, our freelance hourly rate = $40/hour.
What else would you like to know about starting out as a freelancer? Let me know in the comments below. I would love to hear your thoughts!
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