Determining your hourly rate is one of the hardest things as a starting IT freelancer. Charge too little, and you work hard for too little. Charge too much, and you price yourself out of the market. How do you arrive at a rate that is right and that you can substantiate?
In this article I give you a practical method to build your hourly rate, from your desired income and your actual costs. No fixed amount, because that depends on your situation, but a calculation method that yields a substantiated rate instead of a guess.
This blog is for IT professionals starting as freelancers or wanting to redetermine their rate: cloud, network, DevOps and security engineers.
One thing first: this is a method and general information, not financial advice. For your exact figures and your tax situation, go to an accountant. I give you the way of thinking here, not your personal number.
Why is your old gross hourly wage a poor basis?
Because it leaves out a large part of your costs. Many starters divide their old gross annual salary by their working hours and arrive at a rate that way. But as an employee, your employer paid your tax, insurance, pension and continued pay during illness. As a freelancer, that all has to come out of your rate.
That is why a good freelance rate is considerably higher than your old gross hourly wage. If you reckon with your old wage, you are guaranteed to be too low and effectively work below your worth. So do not start with your old wage, but with your desired net income and build up from there.
Step 1: determine your desired net income
Start with what you want to keep net, per month or per year. That is your starting point. Be realistic: what do you need to live and save, and what would you like to earn? This figure steers the rest of the calculation, so take your time for it.
The advantage of starting with your net is that your rate serves a goal instead of being an arbitrary figure. You calculate forward to what you need, not backward from what the market happens to offer. That way you keep control over your own earning model.
Step 2: add all your costs and reserves
On top of your desired net come all the items you bear yourself as a freelancer. They all have to be built into your rate, otherwise you effectively pay them out of your own income. This is the step starters most often underestimate.
The main items to factor in:
- Income tax (discuss your situation with an accountant)
- Disability insurance and other insurances
- Pension build-up you arrange yourself
- Business costs: laptop, software, subscriptions, training
- A buffer for idle time and unexpected expenses
Want a complete overview of everything that comes off your rate? Read our blog on what you keep net as an IT freelancer. And think of your insurances; which you need you read in our blog on that.
Step 3: calculate with your billable hours, not all hours
This is the step where it often goes wrong. You do not work 40 paid hours per week, 52 weeks per year. You have holidays, illness, acquisition, admin and idle time between assignments. Only your billable hours earn money, and there are quite a few fewer of them than you think.
So divide your needed annual revenue, your net plus all costs, by a realistic number of billable hours per year. Do not reckon with your theoretical maximum, but with what you realistically invoice. The lower your billable hours, the higher your rate must be to keep the same. This explains why a freelance rate is so much higher than an hourly wage.
Step 4: test your rate against the market
Now you have a rate that covers your costs and desired income. The last step is testing this against what the market pays for your profile. If your calculated rate is far below the market, you leave money on the table. If it is far above, you must be able to substantiate your extra value.
Market-based rates differ strongly per specialism and seniority. Scarce profiles like cloud and security pay more than more general roles. Use the market as a test, not as a starting point: you start with your own need and costs, and check whether that is realistic. Want to see market-based rates per role? Read our guide to IT rates for freelancers.
Frequently asked questions about determining your hourly rate
How much higher must my rate be than my old wage?
Considerably higher, because as a freelancer you bear tax, insurance, pension and non-billable time yourself. There is no exact factor, because it depends on your costs and billable hours. The message is clear: your old gross hourly wage is a lower bound to go well above, not a guideline.
What exactly are billable hours?
The hours you actually invoice to a client. Holidays, illness, acquisition, admin and idle time do not count. Your billable hours are therefore considerably lower than your total working hours, and it is precisely that number that determines how high your rate must be.
Should I go below the market to get assignments?
Preferably not. A rate that is too low is hard to raise and can even make you come across as less serious. Moreover, a strikingly low rate can be a Dutch DBA Act signal. Better is a market-based rate that reflects your worth, possibly with a sharp but not too low entry.
How often should I revise my rate?
Reassess your rate periodically, for example annually, and for new assignments when your experience or market scarcity justifies it. Your costs and the market change, so a rate that was right last year can be too low now. Raising with the same client is hard, so do not start too low.
Does a low rate count for the Dutch DBA Act?
Yes, the level of your rate is one of the assessment factors. A strikingly low rate can indicate disguised employment, because an entrepreneur usually charges more than an employee. For most IT rates this does not play a role, because they are well above the risk level, but do not go unnecessarily low.
Conclusion: build your rate, do not guess it
You determine your hourly rate not by converting your old wage, but by building up: start with your desired net, add all your costs and reserves, divide by your realistic billable hours, and test against the market. That way you get a rate that is right and that you can substantiate.
For whom is this most urgent? For starters determining their first rate, and for those who have been on the same rate for a while. For whom less? For those who just made a calculation with an accountant.
My advice: take the time for this calculation, and have it checked by an accountant if possible. A substantiated rate gives you peace of mind and a strong negotiating position, and prevents you from shortchanging yourself for years.
Want to spar about your rate and your position?
Want to spar about a market-based rate for your profile and how to position yourself? Plan a no-obligation call with me. I know the market and think along peer-to-peer. For your exact figures, I refer you to an accountant.
Want to join Maedium for assignments that fit your profile? See how to register.
Note: this article is general information, not financial or tax advice. For your personal calculation and tax situation, consult an accountant. Regulations around the Dutch DBA Act and a possible minimum rate may change; consult rijksoverheid.nl or belastingdienst.nl.
