More and more people are making the leap from the world of traditional employment to the life of a freelance software developer. It’s a fast-growing space, with 56.7 million Americans now doing some form of freelance work. However, working as a freelancer comes with a unique set of challenges.
One particular challenge for freelancers is charging the right amount. A survey by Payoneer found that 8% of freelancers were ‘very dissatisfied’ with their income, compared to just 5% who were ‘very satisfied’.
To put yourself in the best possible position when entering the world of freelance work, it’s crucial to have a solid understanding of what you want to earn and how you’d like to get paid. This guide to setting your rate as a remote freelancer will show you how to do just that. We’ll cover how to work out your ideal income, how to decide on a charging structure, and how to state your rates to new clients, among other things.
Let’s get started.
How to Calculate Your Rate as a Freelancer
One of the most common mistakes for beginner freelancers is undercharging. It’s easy to forget that, in the absence of employer benefits like health insurance and paid time off, you have a bunch of extra expenses to consider on top of your usual outgoings.
This means the hourly rate for a freelancer looks different from the hourly rate of a traditional employee or a scaled-down version of a salary.
Your rate will ultimately have to reflect your experience, skill level, and what you can deliver to the client. However, your rate also needs to be high enough to fund your current lifestyle and pay the bills.
Option 1: Calculate Your Minimum Hourly Rate
To work out your minimum hourly rate, you’ll first need to calculate how much money you need to live. This means taking your current income and factoring in additional expenses, such as:
- Retirement contributions (your employer would normally help take care of these)
- Health insurance
- Any other employer perks like gym memberships, travel subsidies, and bonuses
- Office supplies and equipment you need to do your job
- Software subscriptions (for example, accounting software)
- Vacation Time (you likely won’t get paid if you take time off)
Remember to factor in taxes! Once you’ve worked out how much money (after tax) you need to maintain your standard of living as a freelancer, you then need to work backward from this to find your desired hourly rate:
Here’s what you’ll need to consider:
- Decide how many hours per week or month you’d be happy working
- How much vacation or sick time do you want? (Remember to include public holidays)
- Remember to include non-billable (unpaid) work like searching for clients, invoicing, and doing taxes (this is a big part of freelancing)
- Take your desired income (weekly, monthly, or yearly) and divide it by the number of billable hours you’d be happy to work in the given time frame
There you have it – your ideal hourly rate.
At this point, it’s also important to consider how much work you’ll be likely to actually get. If you’re well-established with lots of experience this is less of an issue, but relatively new freelancers may not have a full schedule for a while.
Option 2: Consider What You’re Making Currently and Go From There
Another option is to consider how much money you’re currently making and use that context to figure out how much you’d like to earn as a freelancer. There are a few different scenarios here that might apply to you:
- You want to make as much money as you currently do. You might want to maintain exactly the same lifestyle and income while moving to the flexibility and freedom of freelance life. Here, it’s important to consider the extra overheads of being self-employed and the loss of financial benefits like retirement contributions.
- You’re prepared to take a pay cut. Perhaps you’re already making great money, and you’re willing to sacrifice some pay to gain the benefits of freelance life like the ability to set your own schedule and work on the projects you choose.
- You’re happy where you are and would need the promise of more money to make the switch to a freelance career. After all, becoming self-employed can be a big leap and involves saying goodbye to benefits like paid vacation time. Maybe you’d need more income to justify making the change.
How Much to Charge as a Freelancer: A Guide to Different Payment Structures
The next thing to consider is how you’ll charge. There are a number of options for tech freelancers here, with the most common being:
- Per project
- Ongoing retainer agreements
Let’s start with charging by the hour.
Charging hourly rates is probably the easiest model for a tech freelancer. As we explored in the last section, it’s easy to calculate your desired income with an hourly model, and it’s easy to plan your schedule and bill clients. This is the model we typically use at Scalable Path for the vast majority of projects, with occasional exceptions (such as Logo Design work).
More advantages of charging by the hour are:
- It’s simple for clients to understand.
- It’s straightforward and easy to justify – you can simply say, “this is what my time is worth.”
- It’s easy to adjust the project fee as you go. If the work ends up taking a little more or less time than planned, just change the number of hours you bill for.
There aren’t many downsides to charging by the hour, but some include:
- It’s important to keep track of time and work diligently, so you can justify your billed hours if necessary.
- It’s important to clarify to clients upfront that actual costs may vary from any estimates made as it is difficult to predict how long work will take.
Charging Per Project
Another way to charge is for the project as a whole in one lump sum. You’ll typically agree on this fee before the work starts, and it will stay the same regardless of how long it takes to complete the project.
The main advantage of this structure is that it’s the same fee regardless of how long you take. So if you’re a fast worker, this approach might benefit you more than charging by the hour.
However, there are some drawbacks, such as:
- It can be difficult to change your compensation once it is agreed upon. For example, if the project ends up taking significantly longer than expected, you may end up regretting this path. It’s important to get the amount right the first time, or else have a process for change orders if the scope of work changes.
- Although you only need to agree on an hourly rate once, you’ll need to go through the process of negotiating and justifying a separate fee for every project if you choose the per-project model.
A retainer deal is an agreement with a client to provide ongoing work for a set fee per month. It’s a little like a blend between freelancing and working for an employer, only with more autonomy and fewer perks than an in-house role.
It’s a good deal to have because it provides stability and security. A big worry for many freelancers is having an unpredictable income and having to search for new work every month, which a retainer deal or two can help alleviate.
However, there are downsides:
- It can be hard to get this type of arrangement.
- It’s important to make sure you aren’t being taken advantage of. Make sure you aren’t being asked to do more work than your retainer fee is worth, or treated as a full-time employee without full-time benefits.
How to Research Current Market Rates for Your Services
When working out how much to charge, a helpful place to start can be looking at typical market rates for your services and how much other freelancers charge. Of course, your final rate should be based on the value you can personally provide to your clients, but looking at industry averages can be a good general guide.
Typical rates for tech freelancers like developers and designers vary significantly based on geographical location, experience level, tech stack, and more.
Another factor to consider when setting your rate is where your clients are based. Clients in wealthier regions like North America and Europe will typically pay more than those based elsewhere, and this is worth considering when beginning your outreach.
Average Earnings Are Not a Hard-And-Fast Rule
When looking at market rates and average earnings for tech freelancers, it’s important to remember that it’s okay to deviate from them.
Many developers are undercharging for their services, and this can skew overall averages. For example, some developers on Upwork charge as low as $15 per hour, which is significantly less than what we’d recommend.
This is because Upwork and other freelancer marketplaces like PeoplePerHour and Fiverr use a bidding model where freelancers are encouraged to lower their rates to compete for gigs. This means rates here aren’t necessarily reflective of actual market rates. For tech freelancers, it’s best to use a different kind of model to find work.
How to Raise Your Rates Over Time as a Freelance Software Developer
As a freelancer, you’re in charge of what you earn to a large extent. That means nobody is going to give you a pay raise unless you increase your rates yourself.
It’s important to do this fairly regularly — someone with 5 years of experience shouldn’t be charging the same as they did when they started.
We recommend annual increases. After all, increasing rates very soon after starting a client relationship isn’t the best practice, so a year is a comfortable time frame for this. On top of that, annual increases line up well with things like inflation. If annual inflation for USD is 3%, for example, your annual rate increase should be more than that.
How to Inform Clients About a Raise
When informing clients that you will be charging more, it’s important to clearly explain why, and show why you’re worth the higher amount. You can do this by sharing concrete metrics, such as:
- Customer satisfaction scores and feedback
- Feedback from fellow client team members
- An idea of how much return on investment your work has helped generate
It’s important to notify your clients plenty of time in advance and not make huge jumps in cost at a time.
In addition to knowing when to raise your rates, you should also know when not to increase your rates. Rate raises should reflect your skill and the value you can deliver. Don’t raise your rates just because someone else is.
How to Show Off Your Skills with a Scalable Path Profile
An important step to charging the right amount is clearly showing your value to potential clients. At Scalable Path, we make it easy to do this by giving you the option to show off your skills and experience on your profile page.
By showing what you’re capable of in terms of skills, you can justify your rate and clearly show clients why you charge what you do.
Include as much as you can — this not only showcases your expertise but also makes it easier for clients to locate you in searches. On top of skills, also make sure to include information on experience, education, and work samples to help reinforce your rates.
If you find that you’re skill ratings are not as high as you’d like, it’s worth investing time into developing your skills. Whether it be learning a new technical skill (see online learning platforms and resources for software developers) or learning to speak a new language, it’s worth it to sharpen your toolbox.
Charging the right amount is tough for freelancers. It’s easy to feel like you’re charging too much, and the temptation to scale back rates to increase your chances of getting hired can be strong.
By taking the time to work out exactly how much you want to earn and developing the right habits for achieving this, you’re putting yourself in a strong position. This will allow you to state your rates with confidence and conviction, avoid getting underpaid, and achieve the lifestyle you want while working as a freelancer.
Most importantly, charging the right amount will allow you to dedicate an appropriate amount of time to your work, delivering quality results, and working productively without the stress of a packed-out schedule.
At Scalable Path, our goal is to connect freelancers with the best clients for them and build strong working relationships. To give your freelance career a kickstart, apply to Scalable Path today.