You charge 90 euros an hour, so you are set? If only it were that simple. Between your hourly rate and what is left at the bottom line, there is quite a distance. A high rate says little without the cost side included.
In this article you will learn which cost items come off your rate and what you roughly keep as an IT freelancer. Not an exact calculation, because that depends on your situation, but an honest picture so you know where you stand.
This blog is for IT professionals working as freelancers or considering the switch: cloud, network, DevOps and security engineers.
One thing first: I am not an accountant. This is general information, not tax advice. For your precise net picture, with your deductions and situation, go to an accountant or tax advisor.
Why is your hourly rate not your income?
Because your hourly rate is a gross amount with plenty still to come off. You pay your own tax, insurance and pension, and you have non-billable hours. What you keep net is considerably lower than your rate times your worked hours. That is not a setback, but the reality of entrepreneurship.
An employee sees their employer carry those costs. As a freelancer, you are your own employer, so you carry them yourself. In return, your rate is higher and you have more freedom. But do not count yourself rich based on your hourly rate alone.
Which cost items come off your rate?
Broadly there are five big items: income tax, insurance, pension, non-billable hours and business costs. Together they determine the difference between your rate and your net income. Below I walk through them.
Income tax
You pay income tax on your profit. As a freelancer you may be entitled to deductions that lower your taxable profit, but those have been reduced in recent years. Do not count on paying little tax; set aside a substantial part of your profit for the tax authority.
Insurance
As a freelancer you arrange your own safety net. Think of disability insurance, liability insurance and possibly a health cost buffer. Disability insurance in particular is a serious monthly cost item, but an important one.
Pension
There is no employer building a pension for you. If you want something later, you set it aside yourself. That is a cost item many starting freelancers forget, resulting in a gap in their retirement provision. Factor it into your calculation.
Non-billable hours
Not every hour you work can be invoiced. Acquisition, admin, training, holidays and illness yield nothing. Count on a portion of your working week being non-billable. Your rate must therefore also cover that non-billable time.
Business costs
Finally, your fixed costs as an entrepreneur: hardware, software, a phone, your accountant, training and possibly a workspace. Individually not huge, but together they add up. They are the costs of running your own business.
What do you roughly keep?
A common rule of thumb: of your hourly rate you keep roughly half to two-thirds net, depending on your costs, your deductions and how much you set aside for pension and insurance. The exact percentage varies strongly per person, so really see this as a guideline.
An example purely for illustration, not an exact calculation: if you charge 90 euros an hour, your net income after tax, insurance, pension and non-billable hours is more in the order of 45 to 60 euros per worked hour than that full 90. That is not a setback, it is how entrepreneurship works.
The lesson is not that freelancing does not pay, because it often does. The lesson is that you should set your rate from your desired net, not the other way around. Calculate back from what you want to keep, plus all your costs.
How do you make sure you keep enough?
Start from your desired net income and calculate back. Add your tax, insurance, pension, non-billable hours and business costs. That way you arrive at the hourly rate you really need, instead of a rate that sounds good but is too tight.
A few practical principles:
- Set your rate from your desired net, not from the market alone
- Set money aside for tax directly from every invoice
- Arrange your insurance and pension from the start, not later
- Account for non-billable time in your rate
- Have an accountant check your figures; it pays for itself
Those who base their rate on their actual costs and desired net are not caught by surprise. That is the difference between a rate that sounds nice and a rate that adds up.
Frequently asked questions about net income as a freelancer
What percentage of my rate do I keep?
Roughly half to two-thirds, depending on your costs, deductions and how much you set aside. This is a rough guideline; your personal situation determines the real percentage. An accountant can calculate this precisely for you.
Which cost item do freelancers forget most often?
Pension and non-billable hours. Many starting freelancers count all their hours as billable and forget pension, so their net works out lower than expected in practice. Factor both in from the start.
Is a high hourly rate enough to earn well?
Not automatically. A high rate with a lot of idle time or high costs can disappoint net. A slightly lower rate with a stable flow of assignments can work out better. It is about the combination of rate, occupancy and costs, not the rate alone.
How much should I set aside for tax?
That varies per situation, but count on a substantial part of your profit. Many freelancers set a fixed percentage of every invoice aside on a separate account. Ask your accountant for a guideline percentage that fits your situation, so you are not caught by surprise.
Does freelancing pay off financially?
Often yes, provided you set your rate well and your occupancy is in order. You have a higher rate and more freedom than employment, but you also carry more costs and risk. Calculate it honestly, then you know whether it works out for you.
Conclusion: calculate back from your desired net
Your hourly rate is not your income. Tax, insurance, pension, non-billable hours and business costs come off, and you keep roughly half to two-thirds. That is no reason to write off freelancing, but it is a reason to set your rate realistically.
For whom does freelancing work out well financially? For those who base their rate on actual costs and have a stable flow of assignments. For whom less? For those who count themselves rich on the hourly rate and underestimate the cost side.
My advice: set your rate from your desired net, and have an accountant check your figures. A stable flow of assignments helps enormously, because idle time is your biggest enemy.
Want to build a stable flow of assignments?
A good rate starts with enough suitable assignments. Want to spar about how to build a stable flow? Plan a no-obligation call with me. I think along peer-to-peer.
Want to join Maedium for assignments that fit your profile? See how to register.
Note: this article is general information, not tax or financial advice. For your personal net picture and tax situation, consult an accountant or tax advisor. Figures and regulations may change.
