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How to Calculate Your Hourly Rate as a Solo Entrepreneur

Published on June 28, 2022

Picture your ideal morning.

You start the day with your warm beverage of choice.

After a quick stretch, you head to your work desk and scroll through your inbox.

You receive an email from a happy client who just paid your invoice. Another email asks if you can block off the next few weeks in your calendar because they want to hire your services!

Next, you pop over to Instagram.

You have a DM that says, “It seems like you’re the right wellness coach for my dad! Please share your hourly rate because we’d like to hire you for one-on-one sessions.”

As you’re about to write a reply, you start second-guessing yourself.

You’re wondering if you should raise your hourly rate because of the rising costs of doing business. Or should you charge less now that you’re living in a low-cost-of-living area?

If you ask too much, people might be scared away and not want to buy your product or service. Meanwhile, if you charge too little, you might not get paid what you’re worth and won’t be able to offer the same quality of product or service.

How do you calculate how much to charge for the hours you work as a freelancer? You want to make sure that your business is profitable.

Look no further because this hourly pricing guide for solopreneurs is for you.

How do I calculate my hourly rates?

A common way to calculate how much money you will make in a year is to divide your desired annual income by the number of hours you plan to work each year.

Let’s say you want to work 30 hours/week and your desired annual salary is $120,000. There are 52 weeks in a year. You multiply 30 by 52, and you get 1560 hours. With this information, you divide $120,000 by 1560 hours, and you get $76/hour.

This approach can be problematic, and there’s more to this formula when computing hourly rates. Keep reading to learn why.

7 steps to calculate your ideal hourly rate and not undercharge again

How to calculate your ideal hourly rate as a solopreneur in 7 steps.

When looking for information about ideal hourly rates, solopreneurs are often stumped because there’s no official database to use as a guide.

Many solopreneurs set their prices based on what they think their customers can afford to pay. In some cases, they don’t even negotiate for better rates because they’re afraid of losing a customer. However, this way of pricing services is not sustainable in the long run.

Natalie Coombe, a pricing strategist for women solopreneurs who are running client-serving businesses, said that the most common pricing method for service-based businesses is guessing. Business owners usually find a number that sounds right to them, which is usually not too high so they think people will pay it.

They keep changing and tweaking their price, or flip-flopping over what they should be charging in the hope that they find the magic number that starts to make their real money. Ideally, this will happen before they burn out or have to give up.

Today, we’ll teach you the steps to figuring out your hourly wage without worrying if you’re charging enough. It’s not as complicated as you think!

Step 1: Work out your desired annual income

Figure out how much you want to make each year. Think of it as your annual salary as a solopreneur. When deciding on this number, consider:

Your gross pay as a full-time salaried employee doing similar work
The rates of people who are offering similar services
Your acquired training or certifications
How much you’d like to earn

If you make $60,000 a year as a corporate wellness dietician, you can use this as your take-home pay when you become a nutrition coach.

Don’t ask for too much money. You need to find a price that you can afford and that will also make people want to buy your product.

Shaun Nestor, strategic advisor for coaches and consultants shares the same sentiment:

Think about pricing your services as the money that will come into your agency. This way your agency can run smoothly and you can provide more value to customers in the long-run.

Step 2: List down and compute your annual overhead costs

Wait, what are overhead costs?

Running your consultancy or online coaching business costs money. This includes money for things that are not directly related to making your services or products.

Computing your overhead costs can help you figure out how much money you will make from your services. This number takes into account all of the costs of running your business, like rent, utilities, and materials.

The good news is that solopreneurs have less overhead costs than entrepreneurs. This is because they do not have to pay employee salaries and benefits.

Your annual overhead costs as a freelancer or solopreneur may include:

Childcare
Licensing fees
Office supplies
Marketing costs
Travel expenses
Website hosting
Outsourcing costs
Phone and internet
Business insurance
Hardware equipment
Software subscriptions
Legal and accounting fees
Office equipment and furniture

Fringe benefits, like overtime pay, retirement plans, health insurance, social security, and income taxes are also part of the money you need to run your business.

For example, if your overhead costs equal $3,000 per month, your annual overhead costs are $36,000 per year (3,000 x 12 months).

If you are new to the business, you may not know how to manage your finances or compute overhead costs. For this reason, reach out to people in your industry for guidance. They will be able to give you ballpark figures that you can use as a starting point.

Step 3: Determine your profit margin

Profit margin is a percentage representing your revenues after paying for the costs of doing business (desired salary + overhead costs).

Your profit is what is left to you after you pay yourself and your overhead costs. In other words, it’s money that you can use to grow your business.

Richard Taylor, founder of software development ISArc Limited describes profit margin as what keeps you afloat.

Pricing your product well will allow you to save money in the long run. This might include being able to afford to replace expensive equipment in three years or preparing for unexpected events that can harm your business.

You’re probably wondering — what’s a good profit margin for my small business?

As of January 2022, the average profit margin across different industries is 9.82%. Meanwhile, 10% is considered a healthy profit margin, and 20% upwards is already a high-profit margin.

Step 4: Consider the number of hours you’re going to work per year

The next step in calculating your hourly rate is to gauge the number of hours you intend to work.

“To figure out your desired hourly rate, you need to think about not only how much money you want to make per year, but also how many billable hours you’ll work each week,” explains award-winning author and marketing copywriter Aubre Andrus.

This advice is for freelancers, but it also applies to other self-employed people like consultants and coaches.

When finding your rate, be realistic with what you can charge and how many hours in the week you can work.

For example, if you plan to work for 40 hours per week and there are 52 weeks in a year, you have 2080 hours/year that you can allot for work.

However, you might end up with burnout if you don’t take breaks throughout the year. In addition, there are holidays and sick days to consider.

Owning your own business means that you have to work extra hours on tasks like promoting your business on social media, creating infographics, writing email newsletters, and answering phone calls. You also need to spend time learning new skills and tools.

In short, you can’t be working for 2080 hours in a year.

Examples of “non-billable” hours include:

Holidays: 10 days (80 hours)
Sick/Emergency days: 10 days (80 hours)
Vacation: 14 days ( 112 hours)
Upskill days: 10 days (80 hours)
Admin stuff: 5 hours/week (260 hours)

You’ll have 612 non-billable hours in a year from the list above.

With this example, instead of billing 2,080 hours per year, it turns out that your billable hours are 1,468 hours per year (2080 hours – 612 hours).

Step 5: Decide on how much you’re going to charge for your expertise

When you are computing your hourly pay rate, you should also consider how much experience you have in the niche or industry. Consider how many years you have been working in this area.

“To compensate for your experience, we use a broad market rate of a 1% boost per year for each year of experience you have gained, “ shares solopreneur business coach Stephen Warley.

“For example, if you have three years of experience in the service you want to provide, your hourly rate would be increased by 3%.”

Step 6: Calculate your hourly rate

Belle plans to start a business as a coach. To figure out how much money she should charge for her services, let’s use the figures from the steps above.

She earns $60,000/year as a corporate wellness dietician. She feels that she should receive the same yearly income as a consultant. After asking a couple of friends who are also doing consultant work as dietitians, she estimates her annual overhead costs will be about $36,000.

Belle aims for a 10% profit and estimates that she’ll work about 1,468 hours per year. She has two years of experience.

Here’s how to compute Belle’s baseline hourly rate:

Add desired salary and overhead costs.

$60,000/year (desired salary) + $36,000 (overhead costs + taxes + pension + insurance) = $96,000

Add profit margin to the total amount of desired salary and overhead costs.

10% of $96,000 = $9600 (profit)so $96000+ $9600 (profit) = $105,600

Divide the number of billable hours in a year by the total amount of desired salary, overhead costs, and desired profit to get the baseline hourly rate.

$105,600/1468hours = $72 per hour (baseline hourly rate)

Add 1% (for every year of experience) of the baseline hourly rate to the baseline hourly rate.

For this step, we get 2 percent (for Belle’s 2 years of experience) of $72 and add it to $72 per hour ($1.44 + $72 = $73.44). Belle rounds it up to $75 per hour.

If you’re not in the mood for number crunching, Clockify’s hourly paycheck calculator is worth trying.

Calculating your hourly rate doesn’t end here though. Before you say “I’ve nailed it!”, there’s one more thing that you need to do.

Step 7: Do market research and adjust your hourly rate accordingly

To figure out your final hourly price, you need to do some detective work. This means looking at what other people are charging for similar services and trying to find a fair price that meets both your needs and the customers.

Find out the hourly wage of other consultants and service providers in your industry to ensure that your pricing is realistic and aligns with how much clients are willing to pay.

Here are some ways to find out how much the rest of your industry is charging:

Ask other consultants or coaches in person. You can also do a quick survey online, like in FB groups.
Get in touch with professional organizations in your industry and ask for guidance.
Ask potential clients or customers. You can make a poll on Twitter or post a question on LinkedIn.

When you are doing your research, you might find that your hourly rate is higher than most other people who work on their own. If this is the case, and you have a lot of experience and can offer more value to your customers, don’t be afraid to ask for more money.

What if you need to cut down your hourly rate to remain competitive? Raise your prices often until you’re comfortable with your hourly paycheck.

You can set yourself apart from the competition by having video testimonials on your website from past clients. This will help people know that you are good at your job and that they should choose you.

How to increase your earning potential outside of hourly rates

Finally, you can go beyond hourly pricing and earn more through the following:

Productize your consulting services by selling info products at a fixed price.
Specialize and find a niche market. Instead of saying you’re a nutrition coach, you can position yourself as a nutritionist for people with autoimmune conditions.
Automate repetitive tasks.

Set your hourly rates with ease and confidence

Calculating your hourly rates as a solopreneur and charging what you’re truly worth doesn’t have to be complicated.

Find the middle ground between overcharging and undercharging clients through the following steps:

Step 1: Work on your projected yearly salary.
Step 2: Compute your overhead costs, including taxes, benefits, and insurance.
Step 3: Decide on your profit margin.
Step 4: Determine your billable hours.
Step 5: Take your years of experience into account.
Step 6: Calculate your hourly rate after getting all the information in steps 1 to 5.
Step 7: Do market research and adjust your rate accordingly.

Here’s to getting paid what you’re worth, pricing your services confidently, and doubling your profits!