The number one question asked by the Society of Editors (WA) Inc. members is “How do I set my rates?” or “What do I charge?” In an attempt to answer that, I posted a particular method of working it out on the Society’s forum but I have decided to reproduce it here for your benefit with a few changes to account for superannuation costs/pension which I forgot to account for before.
I hope this following method helps you out. Remember that you should work out an hourly rate anyway because you can then use it to work out a set project fee for certain types of work or a set word rate. If it confuses you, hire a financial planner and an accountant. Onto the method.
*Figures are examples only. Please put in the figures that apply to you. Tax rates and superannuation figures apply only to Australian based freelancers and all figures are in AUD. Please change where applicable to suit your country of business. Projected savings at the end are just for fun – expect your circumstances to change thereby altering these figures in the future.
Accounting for annual income, expenses, tax rates, superannuation, profit/savings and reinvestment
First things first, add up all your annual living and business expenses: $13,500 *This includes rent, bills, food, etc.
For the first annual income figure, round it up: $20,000
Minus the two: $20,000 – $13,500 = $6,500
In tax I would pay: $4,000 + * According to the Australia Tax Office.
Therefore income is not enough.
Double the annual income figure: $20,000 x 2 = $40,000
Minus annual living & business expenses: $40,000 – $13,500 = $26,500
Tax on this amount: $5,850 *According to the Australian Tax Office.
Income after tax: $26,500 – $5,850 = $20,650
How much super per week needed to maintain $29,468 per year at retirement age of 65? $400 per month*According to Media Super’s online calculator.
How much super needed per year? $400 x 12 = $4,800
Income after tax and super: $20,650 – $4,800= $15,850
Therefore $40,000 per year is sufficient.
Hourly rate calculation
Number of working weeks (52 – sick days, leave, slow trade): 45 weeks per year
Weekly income needed: $40,000 / 45 weeks = $888
Number of billable hours if working fulltime: 20 hours (40 – unbillable hours for marketing, sales, accounts etc)
Hourly income: $888 / 20 =$44 per hour
Padding for insurance for unforeseen/unpredicted budget fluctuations or to be in line with IPEd/MEAA recommendations: $60-80 per hour
Project fee calculation
How many hours does it take to complete Project type A? 10 hours (insert your figure here)
Project fee: Hourly rate $60 x Number of hours for particular type of project 10 = $600
Word rate calculation
How many words can you write/edit in one hour? 1000 words (insert your figure here – may differ by type of writing)
Word rate: 10 x (Hourly rate / Number of words) = 10 x ($60 / 1000) = $0.60 per word
* The number 10 is included in the above equation to ensure that you don’t set yourself at 6 cents per word and to make the amount realistic. By all means exclude it if you feel you need to. This is only meant to serve as an example of the method that you can use to calculate it that takes in all the factors.
Additional calculations for projected savings and totals
Life expectancy: 84 years *Check life expectancy with Media Super’s calculator.
Years till retirement: 39
Projected savings if income after tax and super remains the same: $15,850 x 39 = $618,150 plus interest
Reinvest in business each year: $5,000
Profit after reinvesting: $10,850
Projected savings after reinvesting, if figures remain the same: $10,850 x 39 = $423,150 plus interest
Total of projected savings without reinvestment plus superannuation: $618,150 + $381,279 = $999,429
Total of projected savings after reinvestment plus superannuation: $423,150 + $381,279 = $804,429
So does this help you at all? Leave a comment/post on your blog and let me know if you have an alternative method of solving the rate issue. I might create an Excel worksheet that does all the calculations for you and post it for you to download later on.