The age old question, what should I charge for my work, when I’m working for myself.

First, the situation.

Maybe you’re just trying things out, getting a little extra money and doing the “side hustle” thing. Or maybe you’ve decided to venture off on your own. There’s the distinct possibility that you have no job, or your job is suddenly disappearing and you don’t have the luxury to look around for work, unpaid, for what could be months, or years.

…half of older workers—those between 45 and 70 years old—who have been out of work over the past five years are still not working. –CNBC

I know that’s a terrifying thought, but let’s be realistic now. If you lose your job there’s an excellent chance you’re not getting another one as good any time soon, particularly if you’re out of your twenties, or for goodness sake

Comic book creator Moose Baumann at the Big Apple Convention in Manhattan, October 2, 2010. Baumann is holding up a “Will Work For Food” sign as a comment on his being fired from the Green Lantern job years previously.
Photo by Luigi Novi.

something like over 40. You can complain and wring your hands all you’d like, but this is the world we live in.

Workers in their fifties are about 20% less likely than workers ages 25 to 34 to become re-employed, according to an Urban Institute study published last year. –Money

However you got here, here you are. You’re doing your thing. Living the dream. Gulp. You don’t have the luxury to retire early. Some are forced to retire early when another job just doesn’t happen. You can look and look diligently for years and still not get anything, despite your qualifications and experience. Or maybe because of your experience. Ageism may not be legal, but it’s prevalent. And if you manage to get another job, it may pay less than you got before.

Some older workers give up. About a quarter of the long-term jobless in the survey said they’ve stopped looking and dropped out of the workforce altogether…59% of workers 45-70 who have been out of work for more than 6 months take a pay cut when they do get another job. –CNBC

Reasons to Work for Yourself

There are a lot of reasons you may want to work for yourself. My wife always says, when you have 5 clients and you lose one, you just keep going and try to find another. When you have one job and you lose it, it’s a disaster. There’s some wisdom there, as there typically is when my wife tells me something.

There aren’t too many things in life that even seem like a meritocracy, but when you work for yourself, you can actually realize greater returns through harder work. Put in more time, get more work done, get more clients, etc.

You’re not master of your domain if you’re working for yourself – you’re working for your clients. But you are your own boss. If you’re the type who thinks they know best how to manage their time and work, working for yourself might be a lot more fun for you. It may not mean more money or time with family, but it might mean fewer frustrations.

Why Traditional Calculations Will Make You Broke(r) and Living Under a Bridge

In case it’s not clear, when I’m talking about setting your rates, I’m focusing on services (you are a handyman, graphic designer, videographer, arborist, programmer, housecleaner, piano teacher, etc), and assuming no venture funding or anything so fancy.

The traditional answer to this question, what should I charge, is figure out what you need and divide by the number of hours you’ll work, like 40 hours a week times 50 weeks a year for 2000 hours. Here’s why that’s a horrible idea, and after, I’ll tell you how to calculate what you should charge.

It would be a wonderful world if every hour was a billable hour, but that’s not happening. The fact is, you’re the whole operation – new business development, accounts payable and receivable, human resources, account exec, project management, etc. And your clients are not paying for all that stuff, and there is work to do. You’ll have to find people who need your work, pitch them on it, get them contracts, bill them, pay your bills, figure out your own benefits and taxes and all that stuff. And that’s the good news.

Sadly, people don’t always just receive your invoice and immediately send money over. When you find clients who do pay right away without questioning everything do whatever you can to keep them. You’ll find a lot of clients won’t pay without you pestering them. They might want to go over your invoice and ask for explanations for everything. Some clients won’t pay for a month, two months or three months after they’ve received your invoice. Sorry about that. Productized services and passive income are looking really attractive at this point.

OK, so  we’ve established that saying “I want to earn $100k a year, so 40 hours a week times 50 weeks a year makes 2000 hours, divide it up and that’s $50 an hour. Done!” is the fast track to poverty and living under a bridge. Now let’s talk about how to do it properly.

Figuring Out What You Really Need

Let’s figure out expenses.

Some things you can cut corners on. If you’re doing office type work, while it might be nice for you to have an office somewhere cool, or even rent space at a coworking space so your kids don’t distract you constantly, that might have to wait. If you really can’t deal at home, the public library or a coffee shop might have to do.

Equipment

There are some things maybe you didn’t have to think about before. Computer equipment, a good, fast Internet connection, cellphone (if yours was employer supplied), flights, hotels and conference tickets to squeeze palms and find more clients. If your work is teaching piano maybe you need to buy a better piano, upgrade your living room furniture, and plan on renting a space for recitals. Whatever it is you’re doing, think about all the tools and equipment and vehicles you’ll need.

Big Healthy Gorillas

Now we move on to the 800lb gorilla in the room – health insurance. If you have insurance through your spouse or because you are a veteran, or you’re in a country that has all this figured out, or something like that, than you are in an enviable position. Sadly, for the rest of us, you’ll have to get health insurance. It will be expensive, and it will probably stink. This isn’t a political statement, it was expensive and stunk before President Obama. If things continue the way they’re going policies will be even more expensive under President Trump. But expect to pay a mint and not get much for it. If you don’t have it, and you end up visiting the hospital or getting diagnosed with something major that you have to pay for treatment for, you may be financially ruined. Seriously, it happens.

I like to call the type of insurance we’re talking about severed head insurance – unless your head is severed, your insurance isn’t going to help out.

So how much are we talking? It depends on where you are and how big your family is, but I’ve recently heard people with families talking about health insurance premiums of $45,000 a year. Yes, that’s huge. Now take into account what I said – it will probably be bad insurance, too. So anticipate spending a lot. Budgeting at least $5k for actual medical expenses wouldn’t be a bad idea. I wish I could share some links that would clearly tell you what to expect to pay for health insurance, but that is a world where things are anything but clear.

Taxes

If you’re used to life with a full time job tax time probably means a Saturday in the early new year with TurboTax that results in a nice little return. Sadly, when you’re working for yourself, taxes are more complex, and since a bit of your pay isn’t squirreled away regularly to prepay the taxes, it can be a painful surprise. Seriously consider using an accountant, or budget a good amount of time with TurboTax. If you at all can, pay quarterly. Trying to pay everything at the end of the year will likely result in a giant bill you may have difficulty paying.

Cash Flow

The fact is, as I’ve mentioned before, your bills will not be paid in a timely fashion. Sometimes work will pour in to the extent you’ll have to turn away jobs. Other times you’ll have nothing. Add things like high health insurance and tax bills, and you may encounter times when you don’t have enough money coming in. You need to anticipate this as best you can, and price accordingly. Expect people not to pay. Expect high bills. Keep a cash buffer if you at all can.

What To Do With All This Information

Now you add up those expenses, and you take into account the work you’ll have to do aside from billable work. This is definitely something you’ll want to do with a spreadsheet. Moving forward you’ll be able to look at that spreadsheet and know what a proposal costs you, and if a particular job is worth shooting for. You’ll see if your bookkeeping would be worth outsourcing. But first things first.

As you look into all the work you’ll have to do other than what it is you do for money  you can probably figure on doing something more like 1000 hours of billable work a year, and what you’ll need to earn will be a lot higher, when it includes equipment, new business development expenses and healthcare. This will help guide your decisions. How can you lower costs? How can you outsource and reuse work to get in more billable time?

It’s possible the rate you come up with will be a lot higher than what your competitors charge, and you may decide it won’t be possible to charge that much. That’s OK, too, as long as you’re going into this whole thing with eyes open. That doesn’t mean throw out the plan. It means you need to change something. Plan on working more hours, might be an option. Keep that job you were going to leave, just for the medical insurance, until you can figure out how to make more, or until insurance costs go down. Change what you’ll offer. I have another post about doing what you hate you might want to check out. Better to have the work and the money than go broke.  Just make sure you have a plan and you track what you’re bringing in so you’ll know if things are really working out or not.

But Maybe You’re Not Charging Enough

Just as I was wrapping up this post I got an email from Peter Shankman, serial entrepreneur and speaker, about the issue of pricing. What he had to say was really great, and I asked him if I could include some of it here.

About six years ago, I received an email asking about my speaking schedule and fees, to keynote a conference I’d never heard of in a country to which I had no desire to go. (It was winter, and it was a northern country.)

Rather than say no, I sent back an email quoting them an obscene (at least in my eyes) amount for my speech. I figured I’d never heard of them, the conference didn’t have much of a web presence, so an insanely high fee was a sure-fire way to get them to say no, without my having to say no myself.

Twenty minutes later, they replied with one line: “Great! Can you have your assistant send over a contract so we can lock in the date and your rate?” And that’s how I accidentally tripled my speaking fee.

I learned two things from that experience.

Firstly, I was not meant to live in truly cold places.

But second, and more important, I learned that I wasn’t charging enough by a long shot.

And I bet you’re not charging enough, either.

One of the hardest things for any entrepreneur to do is raise their prices. Fear dominates the entrepreneurial lifestyle, and the fear of not getting a gig because you were too expensive is more than likely the number one reason you’re not getting paid what you’re worth.

If you’re interested, and would like to hear more from Peter on growing your business and revenue, he’s hosting a one day, small group conference in NYC you can check out.

Whatever you decide to charge, have a plan, keep notes, ask for feedback, and don’t hesitate to be the expert you know you are. Be cautious and expect the unexpected, and try to get paid as much as possible upfront!