Setting Hourly Rates for the Self-Employed Entrepreneur Part I: Don’t Forget the Hidden Costs

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Many new business owners leave a job where their salary was $50K a year, figure they were making about $25.00 an hour, and set their hourly rate for their new service business at $25.00.

Did you know if you do that, you are actually earning less than half of what you earned in their full-time job, or closer to $12.50 an hour? According to a common rule of thumb for service-related businesses, you should multiply your hourly wage as an employee by 2.5 (some say even by 3) to arrive at your self-employed hourly price, which would be $50.00-$75.00/hr.

As someone who talks to more than 500 people a year who are new to the self-employed world, I find that the tendency to underestimate charges is one of the main reasons people go out of business and have to return to the full-time working world.

One of the biggest misconceptions is that, “If I don’t have the lowest rates around, people will go elsewhere.” To the contrary; I found that once I raised my rates, I added credibility to myself as a professional.

When you set your rates too low, you often end up with the people who haggle over every nickel, and those are often the most difficult to work with. The question is: will the work you generate from these customers pay to cover your doctor bills while you try and cure your stress-induced illness?

Your hourly rate should also cover the costs of:

  • medical, disability, unemployment and theft insurance, retirement pension.
  • sick leave (and keep in mind the 9 paid holidays + 2 weeks vacation most employers provide)
  • supplies (including regular updates, upgrades and fixes of a computer, laptop, notepad, software, apps, not to mention paper, toner cartridges, etc.)
  • marketing (including website and all advertising)
  • self-employment taxes plus federal and state taxes

Your wages also need to incorporate cost of living increases. (The Consumer Price Index has gone up almost 300% since I went into business in 1981, meaning that the $15 an hour I charged as a beginner translates to close to $45 an hour now, without even raising rates to reflect increased experience and efficiency!)

If you don’t add the above figures to your hourly wage (the expenses and unpaid time often add up to 50-75% of your total billing rate), you will be making significantly less than someone working in an employer’s office. Do you want your own (or your family’s) earnings to subsidize your clients’ expenses? When clients try to get you to compromise on your rates, that’s essentially what they’re asking!

Remember: the buck stops with you, so cover your costs, or you may have to go back to calling someone else “boss”!

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