How Do Freelancers Get Paid? A Guide to Rates, Invoices and More

How Do Freelancers Get Paid? A Guide to Rates, Invoices and More

Are you thinking about freelancing or working as a contractor? It can be a great way to get started in your career or build a side hustle you love on your schedule. But as a freelancer, it’s important to know what to expect when it comes to compensation. Especially if you’re switching from a traditional role, learning how to structure your fee is essential. Creating a basic hourly rate will be the basis of your business model.

This guide will look at the various freelance and contract work types and outline some of the most common expenses and challenges.

The Details of Being a Freelancer

Regardless of whether you’re a contractor or freelancer, you’ll be able to choose how many hours a week you work for each client before agreeing to any work. As such, you can set yourself up to have several different clients. If one client’s business model changes for any reason, and your position is no longer needed, you’ll have the security of your other clients to fall back on.

The Difference Between a Freelancer and a Contractor

Contracting differs from freelancing in that contracting employees are generally hired by one company on an as-needed basis. Contracting has become increasingly popular over the last few decades, especially in the IT and software development industries. These jobs often offer remote work opportunities and excellent flexibility. However, the rate and commitment are usually set for a more extended time than comparable freelance roles.

What Are the Concerns of Freelancing?

Naturally, it’s easy to focus on the freedoms and perks, but we’d be remiss not to point out some negatives to consider. While traditional employment offers benefits, like retirement plans and healthcare coverage, most freelancers and contractors do not receive these perks. Also, freelancers are responsible for their marketing, computer, and home office equipment.

If you don’t get paid, following up with clients and pursuing legal action falls to you. Unless you were contracting with a large company, there’s no HR department to protect you if a manager is unprofessional. Another consideration is that there are often swings in income and business periods, so freelancers need to be more resilient financially. Planning for slower times ensures that you can ride out the waves as a freelancer.

How to Determine Your Freelance Hourly Rate

After weighing your options, if you’ve decided that freelance life is the way to go, it’s time to build your business model and determine how you’re going to get paid. As a freelancer or contractor, it’s up to you to determine your rates and collect payments.

This is enormous freedom, but it can be overwhelming at first. Many freelancers charge an hourly rate for their work, while contractors usually cost a fixed price for tasks and projects. Most of the time, you can negotiate with clients to cater these prices to their budget.

Pricing is a dilemma for all freelancers, though. If your rates are high, you risk being passed over for other freelancers with lower rates. But it would help if you still had enough to make ends meet and appropriate compensation for the time and effort you put into your work. So, where to begin your calculations?

Discover the Market Average

A good starting point is doing a little market research. You can research freelance rates on your own by looking through sites like Upwork and other freelancers websites. Compare their portfolio, skill level, and marketing to yours. If it seems comparable, try and discover their pricing strategies. Do they charge clients an hourly rate, per project, or a combination?

Include Your Business Expenses

As a freelancer, your business expenses will be considerably more than that of a full-time employee. Ensure that you consider the office expenses, such as software costs, office supplies, and rent on your office space. Even if your workspace is at home, at minimum, you’re incurring more heating, cooling, and electricity, which is generally covered by a company in a traditional setting.

You’ll also need to consider expenses, such as funds for retirement, personal health insurance, vacation, and sick days. Don’t be alarmed, though. You generally can make more than a traditional employee once you’re an established freelancer.

Handling Taxes as a Freelancer

Without a doubt, your best option is always going to be consulting an accountant, but we have a few tax tips to get you started. A general rule of thumb for freelancers is setting aside 25-30% of your income for taxes. They’ll be able to help you understand the deductions that you can take, if any, for your home office equipment and business expenses, such as some of the extra utilities.

Don’t Forget Non-Production Expenses

Don’t forget that you need to be compensated for administrative tasks. You’ll be spending time submitting bids, invoicing, and communicating with clients. Beyond individual project expenses, you’ll also have general business upkeep, such as marketing and web management. The rate you charge needs to cover your hourly rate for all of your hours worked—even those hours you’re not actually producing a product.

Once you’ve figured out all of your business expenses, you can divide them by the number of hours you want to work each year. This is the minimum you can make to ensure your costs are covered, and you’re paying yourself a fair yearly salary.

Consider Different Pricing Strategies

To a certain extent, you’ll be at the mercy of your first clients when it comes to payment strategies. As a new freelancer, you might find clients aren’t agreeable to paying you an hourly wage, not knowing how quickly you’ll be able to complete the task. Once you’ve grown your business, you’ll be able to set your boundaries as the demand for your services grows.

Consider hourly or daily rates, a per-project fee, or a value-based pricing structure. In value-based pricing, you charge based on the value it will bring the client. Suppose you’re a web designer building a landing page for a client marketing a new course they’re selling. You’ll charge differently than if you’re making that same client a more informational page that won’t directly generate as much revenue. The downside to that pricing structure is that it requires more work on the front end while you’re negotiating with the client.

Getting Paid as a Freelancer

Once you’ve figured out your pricing model and your hourly rates, the rest is relatively straightforward, although you do need to fine-tune the details beforehand.

Create Your Invoice

The best part of freelancing is getting paid, right? Ensure that your invoice has all of the essential elements on it.

  • Client details—your client’s name, address, and order (job) number
  • Your name and address
  • A unique invoice number
  • Invoice date
  • Your business address
  • Title and details about the job (including dates, if relevant)
  • Your payment terms (“Due upon receipt” or “Due within 30 days”)
  • Payment options (credit card, cash, PayPal, etc.)

Consider using invoicing software, such as FreshBooks or Invoicely.

Choose Payment Options

Most clients expect you to accept payment electronically to create a professional business. It’s reasonably easy to find a safe method of accepting credit cards. A popular one is Stripe. Depending on the scope of work you do, you may find that clients like the convenience of PayPal. Be aware, though, that both of those options will charge you a fee. Decide ahead of time if you’re going to include those in your initial quote or add them on.

Launch Your Freelance Business

Once you’ve determined your going rate, you’ll be able to launch your freelance business and start working toward the freedom that comes with being your own boss. As your business grows, you’ll be able to give yourself a raise and maybe even a virtual assistant to delegate the invoicing to. That way, you’ll be able to do more of what you love.

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