How do I set hourly rates as a freelancer?

Sometimes, when you all shoot me questions, I shoot back quick answers. This post is from one of those exchanges.

Question:
How do I set my hourly rate as a freelancer?

“I have a GREAT offer on the table from a company that I really respect to do 5-10 hours of W9 consulting work for them a week. The head of operations said the following:

“I had budgeted this at $25/hr knowing that we may have to be flexible with this on our end. So, I’d like to use that rate as starting point for negotiation. We would be hiring you as a W9 contractor, so if the $20/hr rate is your ideal rate for a part-time W2 position then just let me know what contracting rate you are most comfortable working with. “

Can you help me name a good counteroffer number? I would love to feel like $20/hour was my income, but my rate was higher to include at something towards freelance taxes, retirement savings, health insurance.

My current hourly rate is 22.49, on a W2., full time with benefits.”

Answer:
tldr: I’d say to them “Actually, my ideal rate for W2 is $25/hour, so my ideal 1099 rate is $31”.

Let them come down from there, and push hard for at least $27 to break even against your current w2 job. Below is the math as to why, but first, the psychology:

For starts, the operations head did something tricky here I want us all to notice: they “anchored” the negotiation by suggesting what an ok hourly rate is ($20).

Here’s why you’d immediately push back on that: it makes you look more desireable to assume the position of assuming you’d be working for more money.

Also, $20 is a fucking joke in 2017 in NYC for p/t, on-demand, professional work from an educated employee, and they must know that.  (Yes, it is a realistic pay rate, which is all that some businesses can afford, but you get what you pay for on both sides, and for $20/hr you’d better not expect someone to be coming up with ideas, taking final responsibility, or innovating.)

Strategy: You will immediately increase the anchor amount in your own mind, and then you will calculate your costs to understand what you need, to negotiate from a position of being fully empowered and entitled to ask for a fair hourly rate.

When you’re a freelancer, you have to pay extra taxes, specifically an additional 15% self employment tax, so you always have to tack on an extra 15% at least, just to break even.  But, that does not cove your extra administrative time…so make it at least an even 20%.

This is extra important since freelance/self-employed work always includes uncompensated tasks, like the time you have to spend emailing them back n forth that you can’t bill for, or the time you have to spend invoicing, or the time you spend doing your Schedule C (accounting your self-employed income/expenses on your taxes).

Thus, if in the example, this person makes $22.29 at their current job, they’d need (22.49 x 1.2= ) $26.98 … just call it $27, to break even against their current, W2, no extra work wages.

So, working for less than $27 means losing money against what they’re already doing. Why change jobs if you’re going to lose money, unless it’s something you REALLY want to be doing or think you can advance in?

Now doing this 20% add to “break even” still sucks because you’ll lose money so if you want to pay for your own benefits (insurance, retirement, et al), so to be truly fair to youself you’d need an additional fringe line, perhaps another 20%. (22.49 x 1.4 =) $31.48.

So, if you’re making 22.50/hour at W2, you need to charge $31.50/hour on a W9 to receive the same resources overall. At least.

And that’s if you don’t want to give yourself a raise (hint: you probably deserve a raise if you’re calculating from your last job’s baseline.)

From here, you should research your market to see what others are charging in your field, just to be double-sure you aren’t way undercutting yourself.

Finally, note that setting an hourly rate for ongoing work is a bit different than project rates. We won’t dive into that here, but for one-off projects – check out this article, and think about the problem you are solving for your clients – are you saving them $5k/month? Then you need to charge them more than $1.5k/month. Got it?