Calculating Your Billable Rate

How much do you really need to charge for your labor, products, or services? Everything you do requires the consumption of a limited resource: your time. If you're an independent contractor, it's sometimes easy to overlook underlying costs and time requirements necessary for conducting your day-to-day operations. However, it is these items that frequently account for the constant feeling that you're working long hours with little to show for it.

As small business owners, self-employed consultants, or just freelance operators, it's also fairly common to face questions about the rates we charge. Is it too much? Too little? What is a fair rate that covers our expenses AND pays a competitive salary?  Often, we simply set our rates according to what our perceived competition charges and how we see ourselves fitting into that market space. That gets you started, but it doesn't provide any background or personal confidence when asked to justify the rate. Sure, you can say, 'because I'm worth it.' But, there's no real-world numbers behind it that qualifies the rate and helps you determine if it will work for you.

If you'd like to get a better understanding of how these unique time and expense factors affect you, give the following calculator a try. It was originally created by another company to help determine the employment cost for computer programmers. I rewrote it to use in helping freelance creatives in the marketing/advertising industry figure out their billable service rate. The calculator is divided into two sections. Use the first section to calculate the operating expenses for your business. The second section is used to calculate your minimum hourly rate based on your expenses and productivity data. Sample data values pulled from the US Bureau of Labor Statistics are pre-entered to get you started. (Explanations for the values are included at the bottom of the web page.)

One great way to use the calculator is to enter all of your expenses and productivity data and then set the salary amount to zero. Doing this gives you your internal cost of operation per billable hour. (i.e. the resulting value is what all of your expenses costs YOU on an hourly basis. Multiplying the hourly value by 8 can give you your nominal daily operating cost.  This information can be especially helpful in situations where you are considering donation of your time, volunteering, or otherwise offering your services at a discount.

For example, the common thought is that volunteering can be done at no cost. But as revealed by the calculator, there is actually an underlying out-of-pocket expense associated with any time you spend doing whatever job you do. If your cost of operation value is $25/hr and you donate 10 hours of your time, you have incurred $250 in real, out-of-pocket expense for providing that 'free' service. To be clear, I'm certainly not advocating against donation or volunteerism. This is just one example where having an idea of what your costs are can empower you to make better business decisions that support your long-term stability.

A second example use for the calculator is reverse determining your net salary based on whatever your current billable rate is.  For example, let's say you charge $35/hr for your time and the cost of operations figure is $20/hr. The general public (and even you) will assume you're getting the full $35/hr.  When in reality, you're actually only earning $15/hr. Understanding this relationship between billable rate and net income is very important.

Hourly Rate Calculator

How much do you really need to charge for your services? If you're an independent contractor, it's sometimes easy to forget all the hidden costs and time interruptions you incur in your day-to-day operations. However, it is these items that frequently account for that constant feeling you're working long hours with little to show for it.

Use this interactive calculator form to help you get a better understanding of how these unique time and expense factors affect you. The calculator below is divided into two sections. Use the first section to calculate the total expenses for your business. Use the second section to calculate your effective hourly rate based on typical data. An explanation of the different input sections is also included at the bottom of this page.

We have provided default values. The totals will automatically refresh when you enter your own estimates.

Salary & Expenses

Salary & Benefits
Annual salary$
Bonus$
Total cash compensation$
50000

Annual Business Operation Expenses
Phone Service$
Utilities$
Internet, Email, and Web Hosting$
Accounting / Bookkeeping$
General Liability Insurance (GL)$
Errors and Omissions Insurance (E&O)$
Business Property Tax$
Business Licenses$
Professional Association Memberships$
Marketing and Advertising$
Travel Expenses$
Annual Business Operation Costs$

Equipment, Supplies & Software
Annual allowance for equipment$
Annual allowance for supplies$
Annual allowance for software$
Annual Miscellaneous$
Total allowance for hardware and software$

Office Space
Usable spacesq. feet
Rentable factor%
Gross rentable space
sq. feet
Monthly lease$per sq. foot
Total annual office space expense$

Education & Training
Trade show attendance$
Seminar & Workshop attendance$
Training materials$
Total education and training$

Summary
Salary & Benefits$
Business Operations$
Equipment, Supplies, & Software$
Office Space$
Education & Training$

TOTAL EXPENSES$
per year

2. Utilization & Hourly Rate

Gross Hourshours

PTO (Paid Time Off)
Vacationhours
Holidays, Sick, Personalhours
Total PTO
hours

Gross work hours
hours

Overhead
Overhead%
Project downtime%
Total overhead & downtime
hours

Other Deductions
Trade show & training seminar attendancehours

Summary
Gross hours
hours
PTO
hours
Overhead & downtime
hours
Other deductions
hours

Total productive hours
hours

Hourly Rate Calculation
Total expenses$
Total productive hours
hours

EFFECTIVE HOURLY RATE$
per hour

Annual Salary:
How much do you want to get paid? Remember, this amount should reflect how much you'd be paid if you were someone else's employee. Your freelancing efforts should cover your cost of operations AND pay you a competitive salary. If you don’t know how much someone doing the same job normally gets paid, look up the job statistics at the US Bureau of Labor Statistics.

Bonus:
Will your company pay you a year-end bonus? It won't if you don't budget for it.

Phone Service:
It is likely that you have a business phone line to keep your business and personal life separate. This uses a nominal $20 per month fee for a basic land line.

Utilities:
Do you have separate utility bills associated with your business? $200/mo for water, sewer & power is included.

Internet, Email, and Web Hosting:
If you're in business for yourself, you'll at least have a business website that incurs ongoing hosting ($15 per month) and maintenance fees ($100 per month). You may also pay for hosting a unique email address via google or some other carrier ($5 per month). And, your actual ISP provider probably also sends you a bill ($45 per month).

Accounting / Bookkeeping:
Do you have an accountant who does your monthly books or prepares your annual taxes? Use this blank to enter the amount you annually spend on accounting services for your business.

General Liability Insurance:
Even if you work out of your home, you should still carry commercial, general liability insurance. This amount is taken from an 'average' policy with $2M/$1M liability coverage and $50,000 of Inland Marine coverage. Actual coverage rates will vary based on many factors. Enter your policy rate here.

Errors & Omissions Insurance / Professional Liability Insurance:
This is another insurance policy that deserves careful consideration.

Business Property Tax:
Self explanatory. How much to you typically pay in property taxes per year?

Professional Association Memberships:
Are you a member of a professional trade organization, chamber of commerce, business alliance, etc? If so, add up all of the annual membership dues and enter the total in this blank.

Marketing and Advertising:
How much do you spend per year promoting your business, products, or services? The annual cost for everything from print ads to sponsored search keywords to even business cards and brochures goes here.

Business Travel:
How much do you spend per year on travel that isn’t billable to a client? Airfare, trains, rental cars, vehicle fuel, hotel, meals, etc. The annual expense for everything travel related goes here.

Equipment Allowance:
Anything you use in the course of your service to customers will eventually need to be replaced. For each item, take the expected cost of replacement and divide that by its expected life in years. Add all of these values up and you have your annual equipment allowance. Don't forget to add in a buffer for unexpected repairs, maintenance, or even acquisition of new equipment as needed.

Supplies Allowance:
No matter what it is that you do, you likely use or consume things to do it - whether that’s paint brushes, Super77, foam core, beads, or batteries. Your supplies (raw materials) cost can eat you alive if you’re not careful. Use this blank to to estimate your annual supplies cost.

Software Allowance:
The software you use will eventually have to be updated or replaced. Some software companies also charge an annual (or monthly) subscription fee. Enter your annual cost for updating the software you use. If you don't update every year, take the cost to renew / update and divide it by the number of years between renewal / update. For example, the Adobe CC subscription plan is from $600 to $900 per year.

Annual Miscellaneous:
This is a catch-all field for any other out-of-pocket expense(s) not easily classified as ‘Equipment, Supplies, or Software’. You could also use it for testing the effect of a future purchase/upgrade.

Office Space:
Whether you lease an office or operate out of your home, the space you work in has a value associated with it. Use this section to calculate the cost of your physical work space. A standard 10' x 10' office space is used with a commercial rent rate of $2.00/sq. ft.

Education & Training:
Continuing education is an absolute must for consulting professionals. Whether you attend annual trade shows, quarterly association conferences, or monthly training meetings, these associated costs cut into your bottom line. The cost to attend an event, including registration, travel, hotel, transportation, and food should be considered. Any books, magazines, and tutorial software also should be included in this section.

Gross Hours:
A standard, full-time employee (i.e. YOU... if you weren't working for yourself) is expected to work 2,080 hours a year. This is 40 hours per week times 52 weeks.

Vacation:
If you don't budget for a vacation, it is unlikely that you'll be able to take one. A reasonably experienced employee should get at least two weeks vacation (80 hours). If you've been in the business for many years, you’d probably qualify for more. Three weeks (120 hrs)? Four weeks (160 hrs)? Enter the amount of vacation time you'd qualify for.

Holidays, Sick, Personal:
There are eleven federal holidays each year. Do you get them off? What about sick days? And, personal days? According to the Bureau of Labor Statistics, the 'average full time employee' with 10 years of experience will get approximately 18 days (144 hrs) of paid holidays and sick leave.

Trade Show & Training Seminar Attendance:
In addition to the capital cost of attending continuing education events, there is also a cost in the time you spend attending them. Enter the amount of time you spend per year engaged in continuing education activities.

Overhead:
What percentage of your time is spent doing non-billable activities such as marketing, billing, meetings, technical support, traveling to job sites / art shows, etc?

Project Downtime:
What percentage of your work day is spent between projects, dealing with personal matters, surfing the internet, etc? Be honest...