Understanding Hourly Rates: What You Need to Know

What is an hourly rate?

An hourly rate is a measure used to calculate an employee's compensation. It indicates how much you would have to charge for a specific job. An hourly rate is quoted in dollars and cents per hour.

The most common way to calculate an hourly rate is to divide the annual salary by the number of hours worked. For example, if an employee earns $50,000 per year and works 2,080 hours per year, his hourly rate is $24.04 ($50,000 / 2,080 hours).

Hourly rates are used to calculate an employee's compensation because they directly link wages and the number of hours worked. It benefits both the employer and the employee as it makes it easier for the employer to budget for employee compensation and to have a clear idea of ​​how their salary will be determined.

While the hourly rate is the most common, it is not the only way to calculate an employee's compensation.

Why should you bill by the hour?

Everyone wants to be paid by the hour. You might think the hourly rate is the best way to make money, but that's not always true. If you're working on a project that's longer than an hour, or if you're doing more than one thing at a time, then hourly billing makes sense. But in many cases, hourly billing can lead to dissatisfied clients and overworked freelancers. Here are some reasons why you should bill by the hour:

It's a long-term, personal investment:

Working with your clients for months or years, they should consider their project as a long-term investment rather than an expense. The best way to do this is to bill by the hour. It gives you more time for quality work than if you were billed per project.

Builds customer trust:

If your customer doesn't trust that they're getting value for their project at an hourly rate - or if they don't like being told how much something costs - then they're likely to want no longer work with you in the future. Client who knows exactly what they are paying for is likely to be happy with their investment and more likely to return to you for more business.

Better work-life balance:

If you are an entrepreneur, you will always be in the office. That's a good thing because it means you have a steady income and don't have to worry about the financial aspect of starting your own business. However, this also means you are tied to your desk for a long time, which can lead to burnout. An hourly rate allows you to take breaks and gives you the freedom to go out with friends or family at the weekend.

It stops feature creep:

The first thing you should do when working with a new client finds out what the client wants and what it will cost them to do it. It is essential because it prevents you from being overwhelmed by the list of features your client wants and not having enough time or resources to deliver them.

Reliable and Predictable Website Updates:

One of the main reasons people hire freelancers is they want someone who can get the job done quickly and easily. If you agree to do something for free, there is no guarantee that you will complete it on time or at all. It can be frustrating for both parties and lead to future problems if nothing is done before it becomes an issue for either party.

It opens up accounting possibilities:

If you can show your customers how much their projects will cost, they can budget future projects more efficiently and know exactly how much their projects will cost. If this is the case, your customer will be more willing to pay on time and keep track of their payments, so they don't miss out on fees or late payment penalties.

It stops customers from abusing you:

Dealing with customers with payment problems is difficult because they are often very demanding and can be very unreasonable about what they expect from you or how long things take (e.g., they might ask for an extra week of work if there is a problem during that time). If someone asks for an extension of the payment deadline because you have no control over it, the hourly rate will help deter that type of customer from abusing you.

How to calculate your hourly rate

You know some of the reasons why hourly rates are essential. It's time to figure out

how to calculate your hourly rate. The best way to do this is by dividing your current salary by the number of hours you work per week. For example, if you earn $50,000 a year and work 40 hours a week, your hourly rate is $50,000/$40, or $12.50 per hour.

You can also use this hourly rate calculator to find out your hourly rate.

Once you've set your hourly rate, you need to ensure you're charging enough to cover your costs and make a profit. To do this, you need to add your overhead to your hourly rate.

For example, if your hourly rate is $12.50 and your overhead cost is $2,000 per month, your new hourly rate would be $14.50 ($12.50 + $2,000 /160).

Now that you know how to calculate your hourly rate, you need to ensure you're charging enough to cover your costs and make a profit. To do this, you need to add your overhead to your hourly rate.

Remember that your overhead costs will vary based on your business expenses, and consider this when determining your hourly rate.

It would be helpful to consider increasing your hourly rate over time as you gain experience and proficiency. It is how you can stay competitive and make sure you make a profit.

Useful Read: How To Calculate the Cost Of An Employee + Free Template

What exactly does the hourly rate include?

The hourly rate is the price you charge for one hour of your time. It covers all costs associated with your employment, including:

Operating expenses (also known as fixed expenses):

These are the expenses necessary to run your business (like rent or utilities) and which cannot be changed without doing something to change anything else in your business (such as hiring or downsizing).

Variable Cost:

It is the cost that changes with each unit sold or manufactured. For example, if you sell 100 units per month and your variable cost is $1, your total variable cost is $100 for 100 units sold. Variable costs include labor and material costs and other direct manufacturing costs.

Productive working hours:

It is the time employees spend on productive activities such as manufacturing products or providing services to customers. The effective time is not included in the hourly rate as it may vary depending on the number of clients or workload.

Taxes:

Taxes include federal, state, and local sales tax fees. Sales tax is usually included in every product price, but sometimes it's included in the base price and not charged as a separate fee.

Market Risk:

Hourly wages are often dependent on the global economy and are therefore unpredictable for workers who cannot anticipate changes in their payroll. Hourly wages fall during a downturn and rise during an economic boom.

Hourly rate calculation in two steps

The self-employed and freelancers underestimate the value of their services. It often happens in creative professions, where you realize that you cannot live on what is required on closer inspection. "It's still better than not having a job at all" unfortunately leads to self-exploitation and wage cuts, from which it is difficult to break free. With that in mind, we recommend starting with fair prices.

You cannot demand high fees immediately after founding a company. After all, you must establish yourself, make contacts and gain experience. Even if you're a beginner, you still need to make ends meet on your hourly rate.

How many hours a day can you work on this client?

What are the expenses you have to meet with the money you earn?

Calculating productive working time

If we include time, many self-employed people assume they can work eight hours per day per year. But is that realistic? When we account for holidays and weekends/holidays, this number drops significantly to around 250 days a year. You should plan at least 20 days off to restore your energy. But remember that you are likely to get sick too - it's impossible to predict when and how long that will be. The average is 14 days, so that's a good starting point.

• 365 days/year
• 104 weekend
• 11 public holidays/year (depending on the federal state)
• 20 vacation days
• 14 days absent (due to illness or similar)
• 216 working days/year

That means you have an average of 216 or 18 working days per month. Even if you sit at your desk from morning to night, you probably won't be working continuously for your customers. Have you considered how much work it is to acquire a customer? There's more to customer service than just the time you spend with the customer - you also have to account for accounting, travel times, and other inconveniences.

That means you have an average of 216 or 18 working days per month. Even if you sit at your desk from morning to night, you probably won't be working continuously for your customers. Have you considered how much work it is to acquire a customer? There's more to customer service than just the time you spend with the customer - you also have to account for accounting, travel times, and other inconveniences.

You cannot evaluate the connection between paid, "productive," and voluntary work. It depends, among other things, on your business model. It would help to estimate how much time you need to allocate to the acquisition, training, and administrative tasks before starting your business. Talk to other freelancers who are taking on similar projects to yours. Their expertise is priceless for your hourly rate calculation.

Calculating the Costs

The next step is to be transparent and honest about your expenses. Unfortunately, many self-employed people follow the saying "close your eyes and keep your eyes peeled" when accounting for their expenses. You can only properly assess the feasibility of a business idea if you know how much profit is left after all costs have been deducted.

The costs vary significantly depending on the business model. A hairstylist who runs her salon and employs two staff faces considerably higher expenses than a freelance writer who only needs her laptop. You must also factor in your living expenses and set aside money for taxes and insurance.

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Calculate your personal "minimum wage."

Now you can compare the two. The equation is:

Cost / Labor = Hourly Rate

The number you get is your estimated hourly rate. It's the lowest amount per hour you should be making. Otherwise, you end up in the red. If we assume monthly expenses of 5000 euros for work and life (including taxes and pension) and you work an average of 80 hours per month, you should earn at least 66 euros per hour.

Your goal should always be to make a monthly profit to have a cushion for unforeseen expenses and challenging times. We have all painfully learned how important this is in times like the current global crisis. Therefore, we suggest a profit margin of 10% as an example. The corresponding sales tax applies, except for small businesses, which fall under §19 UstG. Here is an example of how the calculation would work:

EUR .5000 (private costs gross + operating costs net)

/ 80 hours/month = EUR 62.5 net

+ EUR 6.25 surcharge (10%, according to the example)

= EUR 68.75 net

+ sales tax = gross amount

How to calculate an hourly rate?

Here, we'd like to walk you through the math behind the computations. Let's figure out how to compute the hourly rate based on other provided salaries. Follow the step-by-step guide below to grasp everything. For this example, let's assume an annual salary of $50,000 and a 40-hour work week.

Yearly salary to hourly wage calculator = ($50000 per year / 52 weeks) / 40 hours per week = $24.04 per hour

Monthly salary to hourly wage = ($5000 per month * 12 / 52 weeks) / 40 hours per week = $28.85 per hour monthly wage

Weekly paycheck to hourly rate = $1500 per week / 40 hours per week = $37.50 per hour

Daily wage to hourly rate = $120 per day / 8 hours = $15 per hour

Useful Read: What is a payslip? The Must-Read Employers' Guide

Conclusion

You now know how to calculate your hourly rate. You should always keep your hourly rate in mind when dealing with clients and ensure you're being paid fairly for your work. When a client wants to pay less than your hourly rate, you should consider whether the project is worth your time and effort. After all, you want to be able to make a living from your work and not just work to cover costs. The hourly rate is an essential part of it.