8 min read

How Much Should Independent Contractors Charge?


Diana Rapeanu
CPA, Entrepreneur and Freelance Writer
Contributor
independent contractors
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Flying solo and becoming an independent contractor is very rewarding. Being your own boss offers a sense of empowerment and enables emancipation. Working for yourself allows for the centralization of power in your own hands and enables you to maintain control. As an entrepreneur, your profits could be unlimited – if only you knew how much to charge. So then, how much should independent contractors charge for their services in order to maximize profits?

Independent contractors can charge for their services in multiple ways, each of which has its pros and cons. In order to reap the benefits of entrepreneurship, not only do you have to offer exceptional services to your clients, but you also have to master the pricing strategies.

Let’s take a look at three ways in which you can bill your clients.

Billing an Hourly Fee

Contractors who are starting out usually charge an hourly fee for their services. Charging an hourly fee is a good idea if you are working on a large project with an undefined scope. Here are the pros and the cons of opting for such a pricing structure.

PROS

CONS

It is a standard and well-known method for billing. Clients who have hired freelancers in the past are accustomed to this pricing structure.

Clients might not be satisfied with your efficiency, in which case they might ask for a lower hourly rate or for a reduction in the number of billable hours.

You can set your own working schedule and bill only for the time you actually worked.

You need to be able to track your time meticulously, so you don’t end up undercharging.

As you increase in seniority, you can increase your hourly rate.

Price increases might deter clients from working with you.

Independent contractor agreements exist in order to define the scope of the work and to agree on the hourly rate charged.

Failing to agree on the scope or the price of the independent contractor services may result in the loss of a contract.

There are just a few steps to follow in order to determine your hourly rate.

  1. Infer Your Annual Salary

To begin with, you must decide on how much you would like to get paid annually. This number can be based on the salary you used to have as an employee. You can also use market research tools to help you assess how much your competitors are making annually. Then, you can calculate the annual salary you expect to derive from your independent contractor services.

  1. Calculate the Overhead Costs

Overhead costs are charges incurred when you operate your business. These costs are central to business operations as they support your business in generating profit. Such charges include:

  • Rent or office costs;
  • Business insurance costs;
  • Software costs;
  • Marketing and advertising costs, etc.

In the beginning, you should estimate such costs by category and add them all up to determine your annual overhead costs. Keep in mind, numerous overhead costs can be tax deductible, thus reducing the effective total cost incurred by your business.

  1. Determine Your Profit Margin

The profit margin is the profit you expect your independent contractor services to earn in addition to the salary and to the overhead costs. The profit margin varies widely by industry. Let’s take a look at the usual profit margin per industry, according to Sageworks, the leading source of current industry data on privately held companies.

Industry

Net Profit Margin

Accounting & Bookkeeping

18.3%

Legal Services

17.4%

Design Services

12.8%

Education

10.5%

Research the profit margin specific to your industry and calculate the amount that profit represents annually. For example, a 15% profit margin means the business has a profit of $0.15 for each dollar of total revenue earned.

  1. Estimate Your Annual Billable Hours

Billable hours represent the time worked on services that you charge to a client according to a contractual rate. In order to accurately estimate the number of billable hours, you must estimate the number of:

  • Hours you will be working per day;
  • Days you will be working per week; and
  • Weeks you will be working per year.

A standard estimate would be 2,000 billable hours per year for an independent contractor who works 40 hours per week on average and takes 2 weeks of vacation. Billable hours may include time spent:

  • On calls and in meetings;
  • Researching for the client;
  • On delivering the service itself; and
  • On revisions.

Non-billable hours, on the other hand, represent the time spent on tasks for which you cannot bill the client, such as:

  • Pitching to a new client;
  • Writing proposals;
  • Sending emails, etc.

Therefore, it is of uttermost importance to prioritize the time spent on billable hours because those hours generate income, while the non-billable hours do not. 

  1. Calculate your hourly rate

In order to calculate your hourly rate you will need to take into account three parameters: Your desired annual salary (how much you would want to make from a full time job), your overhead costs (how much it costs you to do the work, like rent, power, coffee, etc...) and your profit (profit is the extra income you will make above your salary). In order to calculate your profit, you need to add your desired salary to your overhead costs and then multiply the answer by your profit margin that you determined according to point 3. To do this, you will multiply the sum by 1.x where x is the percentage of profit margin (e.g. if your profit margin is 15% then you multiply the sum by 1.15). Once this is done, you take the result of your multiplication and divide it by the number of working hours you will put in to make this money. (On average most people work from 1,800 to 2,000 hours per year). This will then give you an hourly rate.

Here is an example:

Desired Salary = $40,000
Overheads = $50,000
Profit Margin = 15%
Hourly Rate = ($40,000 + $50,000) * 1.15 / 2,000 = $51.75

In order to find out exactly what to charge, you should research the market and discover whether your expected hourly rate is too high or too low.

  1. Sign an Independent Contractor Agreement

Lastly, it is essential to sign an independent contractor agreement for your services when your client agrees on your hourly rate. Such an agreement defines the scope of the services, the hourly rate and the terms of payment. Contracts are very adaptable and offer a sense of stability to both the client and the contractor.

Document Checklist for Independent Contractor

A document used by the independent contractor listing the required items for a specific job.

Billing a Fixed Amount

Experienced contractors usually charge a fixed fee for their clients because they already know their hourly rate and can estimate with accuracy the length of their project. Therefore, they multiply their hourly rate by the estimated number of hours required to complete the project and quote a fixed amount to the client.

Here are the pros and the cons of opting for such a pricing structure.

PROS

CONS

Billing on a fixed amount requires the meticulous definition of the scope of the project. Both the client and the contractor agree on the scope.

Clients might want to repeatedly amend the scope of the contract in order to include new items, which requires you to continually re-estimate the cost of the project.

You are rewarded for you efficiency, since you are paid the same fixed price even when you finish the contract sooner than expected.

You end up reducing your effective hourly rate when you underestimate the time required to complete the project.

This pricing method ensures a fixed cost to clients who can more easily budget their expenses.

You can potentially lose clients when you consistently overestimate the fixed costs.

Independent contractor agreements exist in order to define the scope of the work and to agree on the hourly rate charged.

Failing to agree on the scope or the price of the independent contractor services may result in the loss of a contract.

It is essential to sign an independent contractor agreement for your services when your client agrees on the fixed rate. It is very important that both you and the client agree on the scope of the project when you bill a fixed amount for a project. Modifying the scope of the project, thus amending the independent contractor agreement, is possible, but why not getting the scope right the first time? Consider using a document checklist to list the required items for a specific job.

Independent Contractor Services Agreement with Compensation

An Agreement made between the client and the contractor where by the contractor agrees to provide the client with certain services, with workers compensation.

Billing Sales Commissions

Independent contractors of all levels of experience can benefit from billing sales commissions. The commission can either be a fixed amount per unit or a percentage of the total amount sold.

Here are the pros and the cons of opting for such a pricing structure.

PROS

CONS

Commissions offer unlimited income opportunities based on sales performance.

Commissions are small when sales are low.

Good performance drives motivation.

Poor performance might undermine motivation.

You can set your own working schedule and your earnings are correlated to your performance.

Commissions can create wide variations in your income if you don’t systematically hit your sales targets.

Independent contractor agreements exist in order to define the scope of the work and to agree on the hourly rate charged.

Failing to agree on the scope or the price of the independent contractor services may result in the loss of a contract.

It is a good idea to sign an independent contractor agreement for your services when your client agrees on the commission rate. It is important to lock in the rates agreed on by both you and your client in order to receive a commission on successful sales.

Lastly, no matter which pricing structure you select, you must invoice your clients. The invoice should have clear and detailed descriptions because clients that are uncertain of the services you rendered often dispute invoices. In order to prevent justifying your billing and to avoid payment delays, you should add a comprehensive description of the services rendered in your invoice to reduce the probability that a client sparks a dispute.

Additionally, both your independent contract agreement and your invoice should clearly state the payment terms. Payment terms specify the period allocated to a buyer to pay off the amount due on the invoice. Payment terms can include advance payment, payment on delivery of services, deferred payment period of 30 days or more, and other similar provisions.

Invoice by Independent Contractor

A document used by the independent contractor listing the cost of services, materials and expenses.

Diana Rapeanu CPA, Entrepreneur and Freelance Writer
I am an accountant who loves reading just about anything, but I have to admit I have a penchant for reading books on business and entrepreneurship. I am a strong believer in the entrepreneurial mindset and I empower myself with such wisdom everyday.
I am an accountant who loves reading just about anything, but I have to admit I have a penchant for reading books on business and entrepreneurship. I am a strong believer in the entrepreneurial mindset and I empower myself with such wisdom everyday.

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