How do I calculate my hourly rate?
Members of the Facet Developer Network set their own hourly rates. If you aren’t sure what your rate should be, this article is for you!
Understanding the Market
You'll find all sorts of anecdotal information out there on how much you should charge per hour. You'll read about some guy that charges $2,000/hr, and then someone else will tell you that $50/hr is the most you can expect to get paid. Let me explain what's going on.
For short duration projects, some companies will pay a hefty fee. You could get paid $10,000 for two days of expert consulting. Hourly, that works out to be about $650/hr. No company will pay those rates for an extended period of time; it just doesn't make sense. $650/hr full-time for a year is about $1.2M... Not gonna happen!
So, if you're doing very short engagements, a rate of $500/hr might make sense for your customers. However, you're going to have a lot of time in between engagements, which will significantly lower your annual income. For example, if you're billing 30% of your time, your annual income would be around $280,000. You might think that sounds great because now you can take 70% of your time off!
Think again. You will need to spend most of that 70% "time off" on sales and marketing - contacting potential customers, putting together proposals, pitching your services, selling your value, etc. - and you're not getting paid for that. Yuck!
This type of short-term project based work is less common in the marketplace. Hiring managers usually think in terms of head-count, not projects. Most companies looking to hire contractors are looking to add a full or part-time head to their product team. Facet specializes in finding long term (3-12 month), stable clients with full- or part-time workloads.
With a full-time workload you can consistently bill 40+ hours per week, allowing you to set your hourly rate at a much more affordable level and focus on the type of work you enjoy most, rather than spending your time on sales.
What does Facet recommend?
Most of our contracts will pay the contractor $100/hr - $160/hr. Some people will make more or less depending on their experience level. (Facet adds a 20% margin on the rate you set.) Rates may be higher or lower for certain geographical areas or specialized skills. Most companies have policies that cap the amount they can pay contractors. It doesn't matter how awesome you are or how badly they want to hire you, they simply don't have the authority to pay more.
Keep in mind that whatever you decide to charge will be compared to the fully-loaded costs of hiring a full-time employee.
Rates for Data Scientists will tend to be slightly higher than software engineers. Rates for PMs, QA Engineers, Designers, and SREs will be slightly lower than software engineers.
Negotiating your rate
At Facet, there are two hourly rates you will define, a preferred rate and a minimum rate.
- Your preferred rate is the ideal rate you would like to charge for your work.
- Your minimum rate is the lowest rate you would consider working at.
We use these two rates to match you with the right work opportunities and to negotiate your rate with the client. Your minimum rate will never be shared with clients.
Preferred Hourly Rate Calculation
Ok, so how do you set your hourly rate?
For first time contractors, one way to calculate your preferred rate is to start with what you want your monthly income to be after taxes, insurance and basic contracting expenses. Some people like to use their current, after tax, compensation as a starting point for calculating their preferred hourly rate.
To start, multiply your desired monthly income by 12. From there, add $15,000 for health insurance if you have a family or $7,500 if you are single. Add in $3,000 a year for contracting expenses (computer, tax accountant, home office equipment, etc...).
Next, calculate your tax rate. To do this, look at your previous year’s tax percentage (this can be found on your tax return) and add 15% for self-employment taxes. You will pay more taxes as an independent contractor because your employer isn't covering part of your social security taxes.
Target Annual Income = ((Monthly Income * 12) / (1 - Tax Rate)) + Health Insurance + Business Expenses)
$204,615 = ((10,000 * 12) / (1-.35)) + 15,000 + 5,000
Now, take your target annual income and divide it by the number of weeks per year you plan on working. For example, if you planned on taking 5 weeks of time off, you would be working 47 weeks in the year (52 - 5 = 47). Lastly, divide that number by 40 and you will arrive at your preferred hourly rate.
Preferred Hourly Rate = (Target Annual Income / Weeks Working) / 40
($204,615 / 47) / 40 = $110/hr
There you have it - your preferred hourly rate! If you feel like you could still use some help figuring out your rate, you can email your support team at [email protected] or shoot us a message on Slack.
Use our rate calculator!
Updated almost 3 years ago