How to Calculate Your Hourly Rate (7-Step Solopreneur Guide)

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.

There’s 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 curious if it’s high time to increase 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, you might scare customers away and have fewer clients. Meanwhile, undercharging robs you of the value and expertise that you bring to the table.

How exactly do you calculate your hourly rate as a freelancer and have a profitable business?

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

How do I calculate my hourly rates?

A common approach to calculating hourly rates 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

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

As a result, many solopreneurs set their prices based on what they think their clients and customers can pay. In some cases, they don’t even negotiate for better rates because they’re afraid that they might lose a client or customer. However, pricing your services this way isn’t sustainable in the long run.

“The most common pricing method most service-based businesses use is guessing. They take their best guess as to what they should be charging, usually finding a number that sounds right which loosely translates to a number that doesn’t sound too big so they think people will actually pay it,” pointed out Natalie Coombe, pricing strategist for women solopreneurs who are running client-serving businesses.

Then they keep changing and tweaking it, or flip-flipping over what they should be charging in the hope they find the magic number that starts to make them real money — ideally before they burn out or have to give it 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 trainings or certifications
• How much you’d like to earn 

For example, if you’ve been making $60,000/year as a corporate wellness dietician, use these figures as baseline take-home pay on your first year as a nutrition coach. 

Don’t be greedy at this point. The goal is to identify a good number that will be sustainable for your needs, wants, and long-term financial goals. 

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

Instead of making it about the money you’re charging people for your services, think about pricing as the money that will be coming into your agency to make it run as smoothly and successfully as possible, and allow you to ultimately provide more value to customers in the long-run.

Step 2: List down and compute your annual overhead costs

Wait, what are overhead costs? 

Overhead refers to the ongoing expenses to operate your consultancy or online coaching business. These expenses may not be directly tied to creating your services or products. 

Aside from helping you set the hourly rate for your services, computing your overhead costs can also give you an insight into your bottom line. 

The good news is that solopreneurs tend to have minimal overhead costs than entrepreneurs because there are no employee salaries and benefits to consider. 

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 your overhead costs. 

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’re new to the business, you may not have a good idea of managing business finances and computing overhead costs. For this reason, reach out to people in your industry and seek guidance for ballpark figures.

Recommended reading: 9 Time & Money Saving Tools for Online Solopreneurs

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 paying yourself with salary and overhead costs. In a nutshell, 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 well allows you to forward plan, whether that’s replacing expensive equipment three years from now or helping you prepare for the unforeseen events that can otherwise set a small business back.

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. 

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 in a piece for freelancers who want to earn six figures a year.

While her advice is written for freelancers, it also applies to all types of self-employed individuals like consultants and coaches.

When finding your own 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. 

As a business owner, you need to devote extra hours to administrative tasks like social media promotion, infographic creation, writing email newsletters, and answering phone calls. Plus, you have to consider the days when you have to learn new skills or 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

Aside from estimating time and efforts spent when computing your hourly pay rate, take your expertise into account. Determine the number of years you have experience in the niche or industry.

“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

You’re almost done!

Based on the figures from the steps above, let’s calculate an example hourly pay for Belle, a corporate dietician who plans to transition to a coaching business. 

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 dieticians, 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 for Belle’s baseline hourly rate: 

1. Add desired salary and overhead costs. 

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

2. 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

3. Divide the number of billable hours in a year to 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)

4. 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

The last (but equally important) step in figuring out your final hourly pricing is to channel your inner Sherlock Holmes and do investigative work. 

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. 
• Get information from salary information websites like the Bureau of Labor Statistics, Glassdoor, Indeed, and PayScale. 

While doing your research, you might discover that your baseline hourly rate is higher than most solopreneurs are charging. If you have extensive experience and can offer more value to your customers, do not be afraid to ask for more. 

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.

Another important tip is to find ways to set yourself apart from the competition to justify your higher hourly pay. For example, you can build a solid reputation by displaying video testimonials from past clients on your website.

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. How? Go the A Solopreneur’s Journey Into Marketing Automation for detailed steps and advice from a seasoned solopreneur.

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 fairly, pricing your services with confidence, and doubling your profits!