Summary: If you work independently offering any kind of service, from freelance writing to financial consulting, you have to set your rates. How do you go about that? Here are a few things you should keep in mind when setting freelance rates or fees to avoid common mistakes.

---

Setting freelance fees can be difficult for a lot of new independent professionals and consultants. Common mistakes are made, and those mistakes contribute to burnout and even failure in a freelance career when professionals realize they underestimated their needs and they can’t raise rates quickly enough (raising rates can be hard and can take a while, as it often means targeting a completely different client market).Keep these things in mind when setting your freelance rates, and you won’t have to worry about raising fees in the near future:

Know What You Need

Before setting freelance fees, know exactly what you need to earn throughout the year. Figure out your personal expenses, any money you want available for savings, emergency funds, or large purchases, and all expenses.

Understand Salary vs Cost

A freelance salary does not directly equate to a similar employee salary. Don’t underestimate what you’ll need to earn by thinking a low overhead means you don’t have to account for expenses.  Freelancers will pay for their own insurance, they pay additional taxes (in the US at least), and there are day-to-day expenses of running a business (even from home).

Don’t think “I earned $50,000 at my day job, so I want to earn the same as a freelancer.” You’ll set yourself up for failure. To be in an equal situation to your full-time job, you don’t need to match the salary; you need to match your “cost” as an employee to that employer. Salary is only one part of it. The employer also paid a portion of your Medicare and social security taxes that you’re now responsible for. They put money towards your retirement and or health insurance. They paid for your basic office necessities. They paid your bonuses. Think about how much money it cost that company to hire you to do your job, and that’s what you need to try to match with a freelance income. It may be a large difference. For example, to have all other things equal with that $50k per year job, you may need to earn $70k per year freelancing. Your rates have to account for that.

Know that All Hours Aren’t “Billable Hours”

Sometimes freelancers set their rates based on an expected 40-hour work week. For example, let’s use the $70k per year gross income goal from the above example. Someone might assume they would figure out an hourly fee by dividing that total by 52 weeks per year and then again by 40 hours per week (which comes to approximately $34 per hour).

That would be a huge mistake. In reality, you have “working hours” (40 hours per week) and you have “billable hours” (which can be as little as half of your working hours depending on your marketing and administrative duties that will take the rest of your time). Using the same example, and assuming only half of your hours are billable, you have to charge clients twice as much per hour for that same yearly goal – approximately $68 per hour – that’s a big difference).

You Won’t Always be Working

We still have a problem with our above example. It’s based on 52 weeks per year. Almost no one will work a full week every week of the year. You need to account for time off – holidays, vacation time, sick time, etc. Let’s say in this example then that we’ll account for seven weeks off between holidays, vacation time, personal days, and sick time. We’re now down to 45 working weeks in the year. $70k now gets divided by 45 weeks and then by 20 billable hours per week, to give you an hourly rate estimate of approximately $78 per hour.

You Have to Account for Down-Time

If you’re new to freelancing or independent consulting, you can’t generally assume that all of your available billable hours are going to be filled every week. You’ll very likely have slow times. You should account for this by adding a buffer to your rate – I suggest tacking on 10 percent.  That would now take us to an hourly rate estimate of approximately $86.

Factor in What You Want

All of those things simply help you find out what you need to charge to earn the same as you did in a full-time job. Anything you want to earn over that now needs to be tacked on. For example, perhaps you feel that you were worth more than your company paid you. Or maybe you want better insurance or more for savings and retirement. If your experience and credentials (not to mention marketing abilities) back up an increase to earn what you want instead of what you need, then by all means, increase that hourly rate. But decide what your time is worth to you before you’re fully immersed in a freelance career, as raising those rates significantly later can be a career-killer for many.

Summary: Maybe your business has grown, or maybe you just realize you could use some specialized help (such as in keeping the books). No matter the reason, you’ve decided that it’s time to hire some help. Should you hire an employee or an independent contractor? Let’s look at some pros and cons of each.

---

When deciding whether to hire an employee or an independent contractor (such as an independent consultant or freelancer), you need to keep in mind that there are legal and administrative issues tied to each option. Here are some of the things you should consider when making the employee vs independent contractor decision when hiring help for your small business:

Employees (Pros)

• When you hire employees (full-time or part-time), you can exercise greater control over them and how they work. For example, you can require that they work on-site during specific hours, and directly under your supervision (or the supervision of someone else).
• You know that the work is being done directly by the person you hired rather than subcontractors.
• You can have someone there full-time dedicated solely to your business if you need that.
• Employees can become more invested in your company and wanting to see it succeed.

Employees (Cons)

• Hiring employees costs more. You have to pay benefits, a portion of the Medicare and Social Security taxes, workers’ compensation coverage, etc.
• You’ll need to spend more time training and supervising an employee.
• There are administration issues to consider – you have to deal with tax withholdings for example.

Independent Contractors (Pros)

• You can hire contractors for short periods of time when you need specialized expertise, or you’re not confident that the business growth will yet support a full-time employee.
• Because they’re specialized professionals who work independently, you don’t need to devote a lot of time to managing and supervising them (as a matter of fact, you really can’t for them to legally be classified as an independent contractor).
• Contractors are less expensive to hire than employees – for example, they pay most of their day-to-day business expenses.
• They can work from their own place of business, so you don’t have to have space available for them.

Independent Contractors (Cons)

• You can’t legally control them like an employee – such as where, when, and how they actually get the job done, as long as the job gets done. For example, if you hire a freelance writer, they can choose to do your writing in the dead of night or on weekends if they prefer – you can’t tell them that they have to write for you during certain time frames. Their responsibility is to meet deadlines.
• They’re free to work for other clients in addition to you – that may very well include competitors or related businesses. For example, if you run a pet store and you hire a freelance copywriting to write the marketing copy for your website, you can’t stop them from writing marketing copy for other pet stores down the line.
• You can’t “fire” a contractor the way you can with an employee – you’ve entered into a contract, and are tied to that contract unless they breach it in some way.

Before deciding to hire an employee or independent contractor for your small business needs, find out about the legal differences where you live (in the US, for example, the IRS classifies your workers as one or the other). If you don’t find out the rules before making the decision, you may find yourself with heavy penalties down the road that far outweigh the benefits you received from hiring contractors (in other words – never hire someone as a “contractor” if you plan to treat them as an employee).