How much do I charge for my services? How much do I charge that will adequately compensate for the salary that I have foregone? What should be my charges for the hour to total a reasonable amount that would justify my decision to take the leap?
When you're just starting out it can be difficult to decide how much to charge? If you charge too much, you may not get the clients. You also need to compete with existing talent. If there are others who are willing to work for less, you will lose out on business. Charge less and it may not be worth it. You have to decide upon a figure that pays your expenses, makes it worth your time and effort and gets you a profit as well
Here's a complete assessment of the challenges ahead, the unforeseen pitfalls and the precautions that you must take, that will enable you to set fees that measure up to your needs.
1) The Layman's "How Much To Charge," Equation
A simple method would be to divide your annual salary by 1000 and that is your hourly rate? To get a much more accurate and precise figure divide your annual salary by your annual hours of work. So if for example your position demanded that you work 2000 hours every year and your annual salary is $70,000. Divide the latter by the former, the answer is 35. So if you charge $35 per hour you should be okay. Not quite. You must also take into consideration overhead costs that you will incur, plus add a little, say 10 percent profit margin to the equation and redo your arithmetic.
On the face of it, it looks rather simple, but is it really that simple. There are many other factors that you will have to consider, failing which you could be left ruing your decision.
2) Your Tax Liability is Likely To Be Doubled
The taxes that you paid earlier were only your share; your company bore a part of it. But now you will have to pay twice that amount. What your employer was paying on your behalf is now what you will have to shell out. Independent professionals are also liable to other taxes and fees. They do not amount to much, but they have to be paid and it would bide you well to ask your state and local authorities about these levies, 1) State and local taxes on business income 2) Business property and inventory taxes and 3) Fees for business licenses.
As a layman's calculation always assume that half of your expected income is going to be given away as taxes.
3) You Have To Pay For Your Own Insurance
As an employee, your company in all probability provided you with benefits, just like it did for its other employees, prime amongst them being insurance. It is very important and in many cases mandatory that you buy these service. Your fiscal and physical health could be hampered otherwise. Just check out the following insurances that you may need. 1) Health insurance, 2) Dental insurance, 3) Life Insurance, 4) Disability Insurance, 5) Professional/business liability insurance and finally one aspect that in the prime of their youth most neglect, 6) Retirement savings.
4) Avoid Burnout And Exhaustion
Many a contractor considers the time that he does not work as loss of revenue. Whilst it is correct that the more you work, the greater the income, but so is the chance of burnout. Remember to take time off and recharge your enthusiasm batteries. Don't work on weekends and take the occasional vacation. So whilst calculating the hours you intend to put into your work take time off for the following: 1) Vacation, 2) Holidays, 3) Weekends, 4) Sick days, 5) Personal Days, 6) Medical/Parental Leave.
5) Account For Business Expenses
There will be many business expenses that include onetime expenses and day to day operational expenses. Most business expenses are deductible, but they do eat into your profits. Moreover the expenses are deductible, only when you file your return at the end of the fiscal year.
Most private enterprises that have folded up have done so because they failed to manage their business expenses adequately. Business expenses are seemingly infinite. These are the initial expenses that you are likely to incur: 1) Computer hardware and software, 2) Office equipment and furniture, 3) Business stationery and marketing materials, 4) Web site programming and design, 5) Initial inventory, if applicable.
Then there will be the daily expenses that will include: 1) Marketing and advertising, 2) Car and other business travel, 3) Business entertainment, 4) Telephone expenses, 5) Legal and other professional services, 6) Clerical Help, 7) Professional books, subscriptions, memberships,8) Payments on business debt.
6) You've Done Your Homework. Now Get Some Professional Advice
As best as you can, you have compiled all your expense and identified all expenses that you are likely to face. Now, since it is a life-changing decision, get some expert help to put it in professional perceptive. Meet an accountant or a financial planner who specializes in your type of business and seek his professional counsel. Let him tell you how much you should be charging per hour. He will be in a position to tell you whether the billable hours that you have come up with are correct or they need to be amended to a more realistic figure.
Yet another layman advice, if you are going to make a miscalculation, err on the side of charging more, not less.
