How to Calculate Your 1099 Hourly Rate No Matter What You Do
If you're unsure of how much to charge for your service and what your 1099 hourly rate should be, you're not alone. Pricing yourself correctly is a common concern for many freelancers. Charging the right price for your service lets you stay profitable while offering your service at a competitive rate, ultimately keeping you and your clients happy.
Knowing your desired hourly rate, answers one of the biggest questions 1099 contractors and freelancers ask themselves: How many hours will this project take and how much should I charge for this?
Independent contractors offer numerous services, ranging anywhere from carpenters, marketers to legal practitioners, and consultants. Although how much you charge for service varies from industry to industry, the basics of calculating your rates remain the same.
To calculate these rates accurately it's important to understand the difference between contractors and full-time employees first.
Independent contractor vs. W-2 employee
While it's safe to assume that the contractors get higher rates and much more freedom in how to perform their job, they don't get the same benefits as W2 employees. Some of these benefits are healthcare plans, 401k, and paid leave. Unlike W2 employees, contractors often use their own equipment, unless something else is agreed upon with the client.
The contractors need to finance these expenses themselves. This is financed through their rates.
Find your 1099 hourly rate
From the point of view of business owners, they save a lot of money on these benefits and taxes when hiring 1099 contractors for short-term projects. That’s why most business owners are comfortable with paying a higher rate for freelancers than W2 employees.
If you're a contractor, think of yourself as a small business owner, collaborating on a short term contract with your client, rather than a full-time employee working for a business.
Depending on your line of work you might charge per project and not hourly. In this case, knowing your desired hourly rate lets you estimate how much you're going to charge for your service, based on the amount of time and resources you plan on spending on it.
Keeping this in mind, we can calculate a sustainable 1099 hourly rate that will keep you and your clients happy.
1. Calculate your business expenses
Freelancers have several expenses that W2 employees aren’t subjected to, and to keep your business profitable, these expenses need to be covered by your income.
So, what do you need to run your business and how much will it cost? Is it just you and your laptop, or are you making a significant investment in your equipment?
Collect the information on what you need for your business and make an estimate of your annual and monthly expenses. These 1099 business expenses can include office equipment, office space, ISP fees, subscriptions, utilities, travel, business, and health insurance.
Save those numbers.
2. Determine your income
Once your business expenses are covered, how much would you like to keep fforor yourself? If you're planning to be contracting full-time, this income needs to cover your health insurance and other living expenses.
To find an appropriate monthly and annual salary look up the full-time salary on trusted sources such as The US Bureau Of Labor Statistics.
Add these numbers to your estimated business expenses to find your goals for monthly and annual income.
3. Calculate taxes
When you're contracting, the IRS considers you as self-employed. This means you're both the employer and the employee. You will have to pay both sides of FICA taxes, also known as self-employment tax. Unlike an employer, the client doesn't withhold payroll taxes from the payout, and you are responsible for paying it.
This adds an additional 15.4% in taxes. Use this free online self-employment tax calculator to estimate how much taxes you’ll owe. These taxes include employer and employees part of medicare taxes and social security taxes, which are usually withheld by the employer. Depending on your income, you either pay your taxes yearly or quarterly. Calculate your quarterly tax payments using this free estimated tax calculator.
Those taxes are constant, add them on top of your monthly income.
As self-employed you get a lot more deductions than W2 employees. This lets you deduct the cost of your business expenses from your income taxes. You can deduct your travel expenses, necessary subscription services, courses, office, work equipment, and anything you need for your contracting work to stay more profitable as it partially lowers your business expenses.
4. How many hours?
Decide the number of hours you'll dedicate to your business. You might want to spend full time or part-time. The important part is to set aside a set number of hours you'll spend monthly and annually working towards your income goals and use it for your calculation.
5. Subtract downtime and unpaid hours
When you work as a contractor, you’ll spend a number of hours doing work that isn't paid for. This work includes looking for clients, marketing, unpaid administrative tasks such as basic bookkeeping, and maintenance.
When you’re starting out it’s realistic to expect that around 20-25% of your time will be spent doing unpaid tasks. This work, necessary to bring in clients and keep the business running, isn’t paid for in itself. Your billable hours need to compensate for that or else you're spending unpaid hours on this or generate a significantly lower profit than you expect.
It’s a common pitfall for freelancers and many get surprised at the amount of time they need to spend doing unpaid tasks related to their business. To avoid it, expect it and subtract these hours from monthly working hours to get the actual amount of paid hours.
Divide your monthly income by the remaining hours and you get the hourly rate that keeps you profitable.
6. Compare your rates to the competition
Once you have calculated your desired hourly rate, compare it to what your competitors charge for your service. Look at other freelancers in your industry, matching your level in skills and experience.
If you find that your prices are lower, you have room to raise your prices as you gain clients. If you find that your rates are higher, find ways to raise the value of your service. This can be done by giving a better experience for your clients when they do business with you or by finding ways to stand out from the competition.
7. Set fixed rates by estimating how long projects take
To calculate your per-project rate, estimate how many hours you’ll spend working on a given project, and simply multiply it by your hourly rate. If you’re experienced in your industry, you should be able to estimate quite accurately how many hours a given project will take and base your rate upon it.
While some independent contractors prefer to charge by the project, others charge hourly for their services. It really comes down to industries and personal preferences. For example, for programmers, carpenters, and marketers it makes more sense to charge per project. Consultants, financial advisers, and babysitters might prefer to charge per hour of their time.
Here’s to charging what you’re worth
Now you know how to calculate your 1099 hourly rate. Using these 7 steps to calculate the rates is very useful for all freelancers out there. It’s a tested method and applicable across multiple industries.
Knowing this, lets you set competitive rates that both you and your client can be happy about, no matter if you’ll charge by the hour or the project. For contractors these numbers allow for a profitable business and living a sustainable life even when working on short term projects. Even if you don’t disclose your hourly rate, knowing your rate lets you set boundaries.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email firstname.lastname@example.org if you have questions.