One of the biggest challenges for self-employed people is setting their hourly rate.
Contractors in the early stages of building their resumes can especially struggle with quoting. You don’t want to undercharge for your skills, but you also don’t want to lose a client to someone offering a more competitive rate.
When you calculate what you should charge clients, think of your rate as a self-employment package. If you were doing the same job as a W-2 employee, what would your salary be? What benefits would you have?
To answer these questions, use our free 1099 hourly rate calculator. You can use it right in Google Sheets:
It’ll help you decide on an hourly rate that’s both fair and competitive.
To illustrate how the calculator works, we’ll use it in an example. Let’s go step by step and figure out the right hourly rate for Alba, a freelance graphic designer living in Minneapolis.
Step #1: Determine your desired annual income
First, ask yourself what you expect your annual 1099 income to be. Again, think about how much a full-time employee doing the same work at a company would make.
If you’re not sure off the bat, the US Bureau of Labor Statistics lists national salary averages for a variety of jobs.
You can also use job listing sites that offer salary breakdowns based on location, such as:
Let’s turn to our example of Alba, the graphic designer in Minneapolis. Averaging the results from the above four resources, a full-time, W-2 graphic designer in Minneapolis can expect to make about $52,000 a year.
So Alba can plug $52,000 into the “Desired Income” spot on our 1099 hourly rate calculator, row 9.
Of course, as a freelancer, Alba pockets a lot less of her gross annual income than a W-2 employee. That’s partly because freelancers wrack up business expenses that W-2 workers typically have covered by their employers.
That brings us to the next step in calculating your contractor rate.
Step #2: Tally your annual business expenses
To turn a profit as a small business owner, your hourly rate needs to cover your business expenses — and leave you some money left over.
According to the IRS, a business expense is anything ordinary and necessary for your work. But that doesn’t mean a cost needs to be imperative to qualify as a business expense. It can also be something that enhances your work, like an ergonomic desk chair for a web dev.
Other common 1099 business expenses include:
- ⚡ Wi-Fi bill
- 📱 Cell phone bill
- 🏠 Home office expenses
- 🚗 Car expenses
- 🍔 Business meals
- ✈️ Business trips
- 🎵 Subscriptions
- 🧰 Equipment and tools
- 🏦 Bank fees
- 🎨 Design software
- 💻 Electronic devices
- 🌐 Website and hosting fees
- 🖨️ Office supplies
- 🎵 Personal marketing materials
Let’s say Alba spends about $200 per month on business expenses. That comes out to $2,400 a year, which we’ll add to the “Annual Business Expenses” row (10) in the spreadsheet.
Tracking your business expenses doesn’t just help you calculate your 1099 hourly rate. It’s also an important part of filing your taxes — and holding on to as much of your income as possible.
How business expenses save money on your taxes
Business expenses lower your taxes by decreasing the amount of income you’re taxed on.
Here’s how it works: when you file your 1099 taxes, you’ll first need to calculate all the self-employment income you earned in the last year. This is called your “gross annual income.”
You’ll then deduct the cost of eligible business expenses from your gross income. You’ll only be taxed on what’s left. And a lower taxable income will decrease the amount you owe the IRS.
How to track business expenses
The best way to stay on top of your work costs is with an expense-tracking app, like Keeper.
As an independent contractor, you have enough on your plate without having to scout through your bank statements for write-offs each time you need to adjust your hourly rate or file your taxes.
Keeper does the work for you, by connecting to your bank account and automatically recording all your business purchases. Whenever you need a list of your expenses, you can download it straight from the app.
If you have a question about how to find more money-saving write-offs specific to your job, you can chat with the Keeper support team, who are always ready to talk taxes.
Step #3: Include your health insurance costs
As a 1099 worker, you’re responsible for securing your own health insurance.
Protecting yourself in case of a medical emergency is part of being a responsible freelancer — whether or not you’re legally obligated to get health insurance. (While the federal government stopped requiring people to have health insurance in 2019, some states still fine people who don’t have health coverage.) Luckily, you can also use the cost of your insurance to lower your income taxes.
To get an idea of how much health insurance costs in your state, head to the Kaiser Family Foundation.
The average monthly premium in Minnesota is about $300, so Alba will add $3,600 to the “Annual Health Insurance” section, row 11.
Step #4: Account for retirement savings
When you’re figuring out your hourly rate, don’t forget to think about saving for retirement. A lot of W-2 employers offer 401(k) matching as one of their employee benefits. So we’ll add that to Alba’s hourly rate.
How 401(k) matching works
A 401(k) is an employer-sponsored retirement savings plan. Using these plans, W-2 workers save a set portion of each paycheck.
Often, employers will match their employees’ 401(k) contribution, up to a certain percentage.
On average, W-2 employees contribute 7% of their gross income to their 401(k), and employers provide a 50% match.
Accounting for employer match as a freelancer
Seven percent of Alba’s gross income — before taking out expenses and health insurance — is $4,060.
When she calculates her hourly rate, though, she’ll only include the employer match, since that’s a benefit she’s foregoing by not working W-2.
A typical employer’s match would be half of $4,060. So Alba adds $2,030 to the “Annual Retirement Savings” part of the hourly rate calculator, row 12.
Head to the IRS website to learn more about retirement saving plan options for self-employed people.
Step #5: Add the extra self-employment tax you’re paying
Self-employment tax is also known as FICA tax. FICA stands for “Federal Insurance Contributions Act” and is used to fund Social Security and Medicare programs.
W-2 workers split the cost of this with their employers. But because the IRS views contractors as both employees and employers, you have to pay both sides of FICA taxes.
Employees and employers each pay 7.65% of the employee’s paycheck — which means you’ll be responsible for 15.3% in total. (Luckily, the employer portion of your FICA tax counts can be deducted from your income taxes.)
Because Alba is basing her hourly wage on what a W-2 graphic designer might make, she’s only going to add the employer half of FICA taxes to her desired income. (She’d still be on the hook for the employee portion if she were on W-2.)
In fact, the table will automatically determine the employer portion of Alba’s 1099 taxes for her, right in row 13.
Tip: If you want the table to calculate the full 15.3% FICA tax for you, click on the cell, then remove “0.0765” from the formula and add “0.153” instead.
Or if you want to see your self-employment tax bill at a glance, you can use this free 1099 tax calculator. To directly compare potential take-home pay, you can also try this free 1099 vs. W-2 calculator, which will show you your tax burden for both types of work.
You can avoid paying too much in self-employment tax by claiming all the business write-offs you’re eligible for. Keeper can help you find these automatically, then file your taxes to claim those savings.
Step #6: Set your weekly work hours
Unlike most W-2 workers, freelancers get to set their own hours. It's one of the perks of 1099 work. The average length of your ideal workweek plays a big role in determining your rate.
Alba plans to work regular nine-to-five hours — including a paid lunch break. So she’ll add 40 hours per week to the calculator in row 14
Step #7: Remember to include your unpaid hours
Contracting typically includes working unpaid hours, or “downtime.” Downtime includes the hours you spend on unbillable work that’s necessary to your business, like:
- Looking for clients
- Taking discovery calls
- Marketing your services
- Conducting industry research
- Taking care of administrative tasks like invoicing
Tobias Liebsch, co-founder of Fintalent.io, a platform for freelance business advisors, offers a rule of thumb: “People who are new to self-employment or not fully booked can expect to spend about 20-25% of their time on unpaid tasks. When you’re fully booked, that number might go down to 10%.”
Alba is still building her roster of clients, so we’ll say 20% of her hours aren’t billable. Twenty percent of Alba’s 40-hour workweek is eight hours, so she’ll add that to the “Unpaid Weeks” section of the calculator, row 15.
Keep in mind that, while “downtime” might imply R&R, the time you spend building your business counts as work. So accounting for unpaid hours shouldn’t interfere with giving yourself vacation — which brings us to the next step in setting your hourly rate.
Step #8: Give yourself paid time off
Working for yourself often involves a certain amount of hustle. To make sure you don’t neglect self-care, your rate should include the cost of paid time off — one of the most enticing employer-paid benefits.
Don’t forget to also include at least some federal holidays in your PTO! Those long weekends can go a long way in your work-life balance.
Alba wants three paid weeks of vacation. (She figures that’s a happy medium between the average two weeks of PTO in the US and a minimum of four weeks in Europe). She also wants to give herself five regular holidays. So she’s going to add four weeks of vacation to the spreadsheet, in row 16.
Step #9: Calculate your hourly rate
With all this information handy, you’re ready to calculate the hourly rate that matches the salary and benefits you’d want as a W-2 employee.
Our graphic designer Alba ends up with an hourly rate of $42.07, which appears in row 17. Here’s how everything stacks up:
Let’s break down exactly how the calculator gets to Alba’s $42.07 hourly rate.
- Start with her desired annual income of $52,000.
- Add the cost of annual business expenses ($2,400), for $54,400
- Factor in health insurance premiums ($3,600), for $58,000
- Add a 401(k) employer match of $2,030, for $60,030. Alba plans to contribute 7% annually ($4,060) to her retirement savings, and she wants her rate to include the 50% match an employer would make if she was a W-2 employee
- Add the 7.65% employer portion of FICA tax that Alba will pay on her income, which is $4,592.30. This brings Alba’s new total to $64,622.30
- Determine how many hours Alba will work in a year. There are 52 weeks in a year, and Alba wants four weeks of paid time off. So Alba will work 48 weeks per year
- Build in a buffer for PTO. Alba intends to work 40 hours per week, but she’ll also have about eight weekly unpaid hours. To compensate for those, we can say Alba will work 32 hours per week
- Multiply 32 weekly hours by 48 work weeks, for a total of 1,536 annual work hours
- Divide Alba’s total $64,622.30 income by her 1,536 work hours to get $42.07 per hour
Step #10: Compare your hourly rate to industry averages
Once you’ve figured out your desired hourly rate, it’s helpful to compare it to what other people in your industry are charging.
If your prices are lower than what others charge, you have room to raise your rates as you gain clients. If your rates are higher, you might want to look for ways to raise the value of your services.
Look to professional associations for help
Some freelancer associations make this research easy — like the Editorial Freelancers Association, which breaks down hourly rates for different types of writers and editors.
If you’re struggling to find solid rate comparisons online, try getting in touch with an industry organization that offers professional development services or networking events. There, you can meet people who do similar work and want to share insights with you. (For instance, Alba might turn to the American Institute of Graphic Arts, a professional association for designers.)
Average hourly rates for independent contractors
In the meantime, we’ve used our calculator to come up with a list of potential average hourly rates for various contractor jobs.
Our methodology for estimating 1099 hourly rates
The average salary for each job was determined by averaging the results from the US Bureau of Labor Statistics, Glassdoor, Simply Hired, and ZipRecruiter.
We kept the rest of the calculator filled in the same way we did for Alba:
- $200 / month business expenses
- $300 / month health insurance
- 3.5% retirement plan contributions
- 40 weekly paid working hours
- 8 weekly unpaid working hours
- 4 weeks of paid time off
Step #11: Experiment with different hourly rates for different projects
The calculator has five separate columns, so you can experiment with different rates depending on the type of work you're doing.
Some jobs might be more demanding or technical than others — you may wish to increase your rates for those. On the other hand, you might take on lighter tasks or passion projects that you’re willing to charge a lower rate for.
For example, Alba might charge more to do a branding package for a regional construction company, and less to design a T-shirt for a nonprofit with a mission she supports.
As you become more experienced with freelancing, you can fill out the columns with various rates for different types of work.
Step #12: Consider per-project rates
Finally, you may find it sometimes makes more sense to charge a per-project lump sum instead of an hourly rate.
To quote someone a rate for a specific project, simply multiply your hourly rate by how many hours you expect the project to take.
For instance, let’s say Alba is designing a landing page for a client and estimates it’ll take her about 20 hours.
Plugging that into the hourly rate calculator, Alba can see that she should charge a flat rate of $841.44 for this project (20 hours x $42.07 hourly rate).
When should you charge hourly vs. per project?
You might want to stick with per-hour pricing if you’re working on a long-term project, or if it’s likely to require many rounds of revisions.
Otherwise, here are some benefits to charging per project:
- Won’t earn less for working faster. “It's often best to charge clients per project because it should be about the value provided rather than the time to complete a task,” advises Connor Barry, long-time freelancer and owner of ACW Studios, a content marketing business. “Freelancers typically develop frameworks for their services that often include overhead costs for tools that allow them to work efficiently. If a freelancer is more efficient than another, it shouldn't be a disadvantage to them.
- No time-tracking. Tracking your hours can be time-consuming. And if you don’t do it diligently, it can lead to unrecorded work time and lost income.
- No invoice surprises. Setting a rate upfront means you don’t have to worry about an unhappy client who expected a project to cost less than it does.
And with that, you know how to calculate your 1099 hourly and per-project rate. Congratulations! This is an important skill for any self-employed person — it can help you choose which projects and clients you want to take on.
Knowing how to quote also helps you establish boundaries. You might agree to a lower rate for a job you really want to take on, or negotiate a higher rate for more intensive projects.
Finally, establishing your current desired income allows you to increase your rate as you gain more experience or expand your services.
Here’s to charging what your work’s worth!
Over 1M freelancers trust Keeper with their taxes
Over 1M freelancers trust Keeper with their taxes
Over 1M freelancers trust Keeper with their taxes
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