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How to Decide on a Fair Hourly Rate for Web Design Work

A Formula for Pricing

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Deciding on a fair hourly rate for Web design work is always difficult. Instead of worrying about what the "going rate" is in your area, especially since Web designers can work nearly anywhere, you should determine what your bottom line is. Once you know the minimum you need to charge to cover your expenses and provide a decent profit, you can find clients and projects that work within that budget.

With the following formula you can determine how much you need to charge on an hourly basis to not only pay your bills, but also make a profit.

What You Need to Know

In order to determine your hourly rate, you need to know the following information:

  • How much you want your annual salary to be each year.
  • How much you pay your employees in salary each year. (This would be $0 if you have no employees.)
  • How many hours you'll work per year.
  • How much overhead do you have per year.
  • What profit goals do you have.

Your Annual Salary and Don't Forget Employees

When you're setting up your own business, it can be tempting to set a target annual salary that is really high. But this can backfire on you. It's better to determine a salary based on the average income for Web designers in your area. You can do this by looking up Web Designer on Salary.com or some other career calculator. When I wrote this article the media salary for a Web Designer 1 was $50,000 across the entire US (according to Salary.com).

If you've got any employees working with you, you'll want to figure their salaries into the equation as well.

Add your salary and your total employee salaries
This is your salary costs

Taxes, FICA, and Insurance

Don't forget that you'll need to pay taxes, FICA (in the US), and insurance. A good rule of thumb is to add 30% of your base salary costs for this.

Multiply salary costs times 0.30 (30%)
This is your Total Salary

Hours Spent Working in a Year

Most people would assume that the hours worked in a year would be 40 hours per week times 52 weeks per year or 2080 hours. But there are also holidays and sick days and vacation days to take into account. A typical US corporation has:

  • 7-10 paid holidays per year (56 - 80 hours)
  • 2 weeks vacation (80 hours)
  • 1 week sick time (40 hours)
Multiply hours per day times days per week times weeks per year to get Total Hours per Year
Subtract out the hours for paid holidays, vacation, and sick time to get Workable Hours per Year

After all those holidays and sick time, that leaves about 1880 hours for work. But that's not all you should factor out. Most businesses are going to have down-time or time that is simply spent on administrative details. These hours won't be billable to a client, so you need to remove them from the total hours available in a year. A good rule of thumb is about 25% of your workabout hours will be spent in activities you can't bill for. An older, more established business might go as low as 15% and a brand new business might go as high as 50% (more than that, and you're really not working, now are you?).

Multiply your workable hours per year times 0.25 (25%)
This is your Billable Hours per Year

Your Base Rate

With just billable hours and total salary, you can determine a base hourly rate. This is not your final rate, remember, but it is what you would need to charge to cover your salary and that of your employees.

Divide your total salary by your billable hours
This is your Base Rate

Overhead - What Else Do you Need?

Overhead costs are all the things that go beyond salary, such as:

  • Rent on office space
  • Office equipment (including your computer, desk, and chair)
  • Office supplies (including business cards, paper, pens, etc.)
  • Marketing, advertising, and PR

Remember, the IRS (and similar tax boards in other countries) don't allow you to buy a new computer and office equipment every year, so you'll need to spread those costs out over several years. This is called the amortization schedule. For the specific length of time, you should talk to your accountant or tax preparer.

Once you have decided what your overhead costs are you can divide them by your total salary to get your overhead percentage. Add this percentage to your base rate to get your overhead rate. This is the rate you need to charge to cover both salaries and overhead.

Overhead divided by Total salary is your Overhead percentage
Multiply your overhead percentage times your base rate, and then add them together. This is your Overhead Rate

Profits

In the United States, a business has only a few years to show no profit before they are considered a failed endeavor. So it's a good idea to put some extra money into your rate to show a profit. I don't recommend aiming for a lower profit than 10% - I like to aim for 20% profit.

Multiply your overhead rate times 20% and add that to your overhead rate
This is your Hourly Rate

Most likely, your hourly rate will be some ugly number like $67.32, it's okay to round up or down to get a number that sounds friendlier like $70 or $65.

Next page: Test Your Rate

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