How to calculate your hourly rate as a self-employed worker

A. Define the gross salary you need to earn 

To obtain the gross salary (before charges and taxes) you'll need to earn (variable A in the equation), you should:

• Take stock of your annual personal expenses. You'll want to draw up a budget.
• Remember to leave room for savings: You'll want to set aside an emergency fund and contribute to a Registered Retirement Savings Plan (RRSP). 

Another way to help you define your annual salary and make sure it meets your needs is to think about how much you'd earn if you were carrying out the same duties as an employee of a business. However, keep in mind that by being self-employed, you assume certain risks. It would thus be fair for you to earn a higher salary on your own. To ensure your salary reflects your value, take into account your years of experience and your level of education. 

B. Set aside an amount to reinvest

A portion of your hourly rate should be used to upgrade your skills and purchase goods and services for your business. This is variable B in the equation. A few examples of potential investments:

• Creating or improving your website
• Acquiring or updating equipment (computer, tools, etc.)
• Completing a course
• Paying for business travel
• Financing a project that will boost your visibility
• Launching an advertising campaign 
• Developing your business

C. Calculate your annual operating costs 

No matter what the legal status of your business is or how you define yourself (self-employed worker, freelancer, solopreneur, entrepreneur), a portion of your hourly rate will have to cover the inherent costs of owning a business. This is variable C in the equation. 

As a self-employed worker, you have the obligations of both an employee and an employer. To calculate your business expenses, consider your set-up costs, operating costs, benefits, contributions to government programs and income taxes.

For more information, read our article How much to set aside when you are a freelancer?

Set-up costs

If you're planning to start your own business, think about how much you'll need to invest. These costs will vary based on the legal form of your business. Here are two examples:

• Company (Inc.): There are fees associated with several of the steps of incorporation, as well as annual costs to maintain your company in good standing. You'll also have to set aside more resources for accounting, since you'll need to produce financial statements and file a tax return for the corporation. 
• Sole proprietorship (in your name): Setting up a sole proprietorship is less expensive and you won't have to file a tax return other than your personal tax return. If you're in Quebec, keep in mind that (unlike in other Canadian provinces and territories) you will need to file a federal and a provincial tax return.

Expenses

Variable C in the equation used to calculate your hourly rate as a freelancer must also account for the costs associated with doing your work. These could include:

• Telephone service
• Internet access
• Travel (gas, car, taxis, etc.)
• Insurance
• Rent or mortgage payments on your workspace (if applicable)
• Materials (e.g., paint if you are a painter)
• Furniture

Benefits and contributions

When setting your hourly rate, you should also consider the value of the benefits you'd have if you were an employee (e.g., dental insurance). As a self-employed worker, you're fully responsible for these expenses. 

Self-employed workers also incur other specific costs. For example, employers and employees normally share the cost of contributions to the Canada Pension Plan or Quebec Pension Plan (in that province). 

Self-employed workers have to cover the full cost of these contributions. Although you're not required to contribute to Employment Insurance, you can participate in the EI benefits program designed for self-employed people (external site).

You may have other expenses that should be included under variable C of the equation. Do you need to hire employees? Remember that you'll need to pay for their benefits and contributions. 

Income tax for self-employed workers

Taxation is more complex for self-employed workers than for salaried employees. The exact amount you'll need to pay depends on your business situation and your province of residence. If in doubt, don't hesitate to ask an accountant or tax specialist for advice.

To make sure you're prepared and meet all tax requirements, read our article Tax returns for the self-employed.

D. Estimate your billable hours so you can calculate your hourly rate as a freelancer

Once you've defined variables A, B and C, you'll need to divide the total by your annual billable hours (variable D). Keep in mind that your billable hours are not the same as your hours worked. 

For example, you won't be able to bill your clients for time dedicated to:

• Developing your business
• Accounting 
• Upgrading your knowledge

To estimate your billable hours, count how many hours you work each week (usually between 35 and 40), then deduct the hours that are not billable. 

Vacations and holidays

Many self-employed workers don't take any vacation when starting up their business. But taking a few weeks off each year is hardly a luxury. It's important to take some time to rest and recharge. You should also account for statutory holidays and give yourself a few days off in case of illness. There are 52 weeks in a year; subtract the weeks and days when you won't be working.

Slow periods

You should also consider the nature of your work when calculating your hourly rate as a freelancer. Example: The shorter your contracts are, the more likely it is that you'll have some downtime. If this applies to you, subtract an amount from the total weeks worked to account for slow periods.

Multiply the number of weeks you work in a year by the number of billable hours per week. Bingo: Now you know variable D in the equation you'll use to calculate your hourly rate as a freelancer.

Example of the calculation

1. After considering: 

• The gross salary you need to earn (A)
• The profit margin to be reinvested in your business (B)
• Your operating costs, including contributions and taxes (C)

You conclude that your annual revenues should be $110,000.

2. You work 40 hours a week, including 5 hours that are not billable. That puts you at 35 billable hours. To account for less productive periods, you round down to 30 hours per week.

3. From the total of 52 weeks in a year, you deduct: 

• 6 weeks for vacations and statutory holidays
• 4 weeks (20 business days) for slow periods

That means 42 weeks of work. 

4. You multiply those 42 weeks by the 30 billable hours per week and get 1,260 billable hours per year. 

5. Then, you divide your annual target revenues ($110,000) by the number of billable hours per week (1,260 hours). 

6. The result is an hourly rate of $87.30.

E. Compare your hourly rate to the market

Before you start hunting down contracts and offering your services, you should figure out if the hourly rate you've calculated is realistic compared to:

• The market
• Your experience
• Your skills
• The competition 

How much do your competitors charge their clients? If your hourly rate is significantly higher than what your competitors charge, and therefore doesn't align with supply and demand, you should review certain aspects of the equation. For example, you could cut your business expenses, reassess your lifestyle or simply plan on working more hours.

At the beginning, you probably won't know what your competitors are charging. To find out, ask people you know in the same field or check out online groups, communities and forums for freelancers. 

The good news is that you're not the only self-employed worker trying to figure out your hourly rate. The answers are out there. We're here to answer your questions and meet your business needs.