Freelance rates

What It Means

FreelanceFreelancingWorking for yourself, selling your skills to different clients by the project or the hour instead of holding a long-term job with one employer. See more rates are the prices a self-employed worker charges clients, by the hour, by the day or by the project. Unlike a wage, a freelance rate has to pay for things an employer would usually cover: the freelancer's own equipment and software, unpaid hours spent finding work, and Social Security and Medicare through self-employment taxSelf-employment taxThe Social Security and Medicare tax self-employed people pay on their own profit: 15.3% of 92.35% of net earnings, owed once those reach $400 a year. See more. So a freelance hourly rate that looks high next to a salary can come out much closer once those are paid.

How People Say It at Work

• "My rate is sixty an hour, or a flat fee for the whole project."
• "Set aside money for taxes from every invoice."
• "I can't bill for the hours I spend on invoices and emails."

The Breakdown

Formula (Buhata's suggestion)

1. Profit you need = the income you want ÷ 0.8587, since about 14.13% of profit (15.3% × 92.35%) goes to self-employment tax.
2. Money to bring in = profit + yearly business costs.
3. Hourly rate = money to bring in ÷ billable hours a year.

Worked example. Dana is a freelance designer who wants $50,000 a year left after costs and self-employment tax. Her software and equipment cost $6,000 a year. She expects to bill 25 hours a week for 46 weeks, since the rest of her time goes to admin, finding clients and time off. All the numbers are made up for the example.

What the result means. Charging less than this, Dana would fall short of her $50,000 once costs and self-employment tax come out. Income tax is figured separately and comes on top, so the real rate she needs is higher still.

What moves the number

• Billable hours. Fewer hours you can bill means a higher rate for the same income.
• Costs. Software, equipment and insurance all have to come out of what clients pay.
• Taxes. Self-employment tax applies to profit, and income tax comes on top.

Good to Know

The IRS sets self-employment tax at 15.3%: 12.4% for Social Security and 2.9% for Medicare, figured on 92.35% of your net earningsNet incomeWhat's left after everything is taken out: on a paycheck, pay after taxes and deductions; for a business, profit after all expenses and taxes. See more from self-employment. You owe it once those net earnings reach $400 in a year, and the Social Security part only applies up to a yearly cap on your combined wages and net earnings. Income tax is separate, and the IRS's Form 1040-ESQuarterly estimated taxesTax paid to the IRS in four installments during the year on income with no withholding, such as self-employment profit; due April, June, September and January. See more is its estimated tax package for individuals. For your own numbers, ask a tax professional.

Related Terms and Categories

• Freelancing

  Working for yourself, selling your skills to different clients by the project or the hour instead of holding a long-term job with one employer.

• Self-employment tax

  The Social Security and Medicare tax self-employed people pay on their own profit: 15.3% of 92.35% of net earnings, owed once those reach $400 a year.

• 1099 contractor

  An independent contractor whose pay a business reports on Form 1099-NEC; they're self-employed, so no tax is withheld and they owe self-employment tax.

• Quarterly estimated taxes

  Tax paid to the IRS in four installments during the year on income with no withholding, such as self-employment profit; due April, June, September and January.

• Gig work

  Short-term, on-demand jobs or sales, often found through an app or website, such as rides, deliveries, errands or selling goods; the IRS treats the pay as taxable income.

• Side hustle

  Paid work done alongside a main job or other commitments, such as freelancing, delivery driving or selling goods; the IRS treats the income as taxable.

Pay, rates and costs