Updated for the 2023 tax year.
Asking for a raise is probably the most direct way to increase your income — but freelancing might just bring in more money. And you'll be expanding your skill set, professional network, and resume all at the same time.
“Moonlighting” outside a regular 9-to-5 gig has been common among designers, writers, and other creative types for decades; but with the rise of the gig economy,” there’s a good chance someone or some company needs your particular skills or talents — no matter what they are — for an on-demand or long-term project.
If you’re freelancing (or thinking about it), you're not alone: 54 million other Americans — about 34% of the workforce — do some type of freelance work, too.
Assuming your current employer allows it (some don’t, so check with your HR department to be sure), the obvious benefit to freelancing is more cash in your pocket. But it also gives you a chance to stretch beyond your day job, build new skills, and hone your craft. In the long run, you end up with a better collection of work and a wider range of experience, which can boost your income and your value as an employee.
You also get to practice business management. First, you have to find clients — something that always seems harder than it is. Just keeping up with friends and colleagues can open a lot of doors.
After that first job, there’s no easier way to grow your business than by word of mouth. Great work gets noticed, and each project is a stepping stone to the next one.
Setting Your Rates
Figuring out the value of what you do can at first seem like a challenge. You don’t want to just spout out a number that “sounds good,” or “seems right.” And you definitely do want to factor in the the scope of work requested, what the deliverables are for each project, and time for rounds of revision. This can help you give clients a high and low estimate, based on best and “worst” case scenarios, as far as hours and timelines.
Another option is asking your client what their budget is for the project, and what problem your work will solve for them. Lifehacker defines this approach to help freelancers think beyond a standard hourly rate.
Take your personal expenses into account, as well as any new costs you’ll need to cover once you’re self-employed. Think health insurance, accounting services, good Wi-Fi, and up-to-date software and equipment. This is called a “survival rate,” but you want to earn more than enough to survive.
If you’re a full-time freelancer, you won’t have the benefit of a 401(k) with company matching. But you can still invest in your retirement with an IRA. If you’re under 50 years of age in 2023, you can contribute up to $6,500 per year — Ellevest recommends aiming for this number.
And don’t forget taxes (the IRS won’t let you!). Plan to set aside about 30% of your freelance income for quarterly state and federal taxes. Some freelancers in big cities set aside a little more for big city taxes. When you’re an independent contractor, taxes aren’t taken out of your paychecks like they are by your regular employer, and you’ll pay an additional self-employment tax of 7.5%.
Here’s a general equation for calculating your hourly rate, with some real numbers as examples:
$3,000 — Monthly personal expenses, including household bills
$1,200 — Monthly overhead and operating costs, including internet, a new laptop every two years, printing, software, phone, etc.
$500 — $6,000 into an IRA, annually, broken out by month
$4,700 — your monthly total
That means billing $56,400 annually, and we haven’t gotten to taxes yet. Remember, you have to set aside 30% for Uncle Sam.
$56,400 — annual income needed to cover basic and personal expenses, overhead, and IRA contributions
$73,320 — plus 30% for taxes
Now, assuming you have three to six months’ worth of this monthly total in emergency savings, Ellevest recommends putting 20% of your gross salary into a diversified portfolio each month. The beauty of freelance means you can also work that number into your rate.
$73,320 — annual income needed to cover basic and personal expenses, overhead, IRA contributions, and taxes.
$87,984 — plus 20% for an investment account
Which means you need to bill about $7,332 each month. If you were working 40 hours a week, 52 weeks a year, you’d charge $42.30 an hour. But I’m guessing the whole reason you went freelance in the first place is to have flexible work hours and vacation time. If you want to take three weeks off for vacation each year, and budget the standard five sick days, your hourly rate goes up to $46.83.
Now, let’s say you want to work 30 hours a week. Remember, a few of those hours will be spent doing non-billable, administrative tasks like invoicing and pitching. Also, some weeks you’ll have more billable hours than others, so you want to plan for those gaps in full time work.
If you’re only billing 26 hours per week, 48 weeks per year, your hourly rate should be $70.50.
You can still use that equation even if you’re only moonlighting or freelancing part time. If you’re giving up your free time outside of your regular job, charging a full-time rate is a way to compensate yourself.
If you want to know more about calculating rates, DesignSponge delves into all the factors in great detail here.
Revisit these numbers regularly, especially as your monthly expenses and overhead changes. And as you get more experience, you can increase your rate and be more selective about the projects you take on. You always want to know that you’re making what you’re really worth.
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