When the average person heads to work every morning, they come into an office paid for by their employer and sit down at a workstation furnished by their employer. Their pay is calculated and their paycheque arrives on schedule, with no extra effort on their part. They likely have access to things like an employer negotiated health insurance package, a retirement account, and even small things like free bagels in the break room. None of these are available to you as a freelance contractor.

While there are many advantages to choosing freelance, it’s important to remember that you’re essentially a business owner–even if you don’t think of yourself that way. And when a business sets prices, they have to keep their overhead in mind. Otherwise profit is not only elusive, it’s just a big, blurry unknown.
 

Here are some example items based on some of my expense averages:

Example expenses:

#1 – An average monthly business expense rate of $595 in the last 6 months

#2 – A monthly home office claim of $125 per month(1)

#3A – Invoice fee processing average of 15% per dollar earned on UpWork(2)

#3B – Invoice fee processing of 2.9% + 30¢ per transaction on Wave

#4 – If you’re based in the US/a US citizen: 15.3% minimum freelance tax (paying both employee and employer share of social security and medicare taxes), not including any state taxes.(3)

These calculations do not include costs that are more difficult to assess such as: health insurance/expenses (which vary wildly), lack of fringe benefits, and various opportunity costs.

Expense application example:

At the end of the day, every $20 I earn immediately has a deducted value of $3 on UpWork or 88 cents on Wave. The remaining $17 or $19.12 has my expenses deducted (30% to 40% on average, so let’s say 35%). That leaves $11.90 or $12.43. From that, a final minimum tax of 15.3% is deducted, leaving $10.08 or $10.53 as my effective “take home pay”–a loss of between 50.4% and 52.6%. Meanwhile, your employer, by choosing to go with a freelancer, is saving themselves the cost of:

• Your workspace and equipment (and associated amortization)
• Your payroll processing fees
• Your payroll taxes

This list is not comprehensive–it does not mention the more “difficult” to determine savings for employers such as miscellaneous fringe benefits.
 

How to track your expenses

Tracking with a spreadsheet

I’ll make this one easy for you: Here’s a handy dandy Google Sheet you can use to track your income and expenses. It’s plugged in with a variety of sample data to give you an idea of what to track and how to track it (also so the formulas can work without generating an error). If you’re exceptionally data minded, you could possibly use a tool like Zapier or IFTTT to auto-populate it with information. I personally find it easier to track via web apps and then plug the info in manually on a quarterly basis.

Tracking with web apps

If you go looking, you will discover there are approximately a million pseudo-accounting web apps vying for your business. The industry heavyweight, Intuit, owns a lot of them. Of all the Intuit products, I like Mint the best. Mostly because it allows you track so many different products, including your basic credit cards and bank accounts, to investment portfolios from retirement accounts and IRA services offered by Wealthsimple or Wealthfront to the automated micro-investment app Acorns. You can do things like observe your net worth over time (if you’re a charts nerd) or do some in depth budgeting.

Of course, Mint doesn’t do anything like payment processing or invoicing. This is another sector that has endless options, but if you’re looking for something that does a little bit of both expense tracking and invoicing and payment processing, I highly recommend Wave.

Here’s what I like about Wave:

• Easily customized invoices and estimates
• Easily managed client records
• Clients can store payment info
• Clients can pay directly by credit card (fee processing of 2.9% + 30¢ per transaction)
• You can bill in any currency

There’s a lot more options in Wave that I don’t take advantage of, such as expense tracking (you can sync your bank accounts) and recurring invoices (for folks who provide flat rate services). The very best part about Wave is that all the features I’ve mentioned so far are free. You can get even more stuff, like payroll, bill pay, and other higher level accounting and support with the paid version.

After all that, how do you set your rates?

The answer is: it depends on how much profit you want to make and how much your skills and time are worth to you and to the market. Your profitability is generally a matter of preference, so let’s move on to determining your skill/time value.

Figuring out what your skills are worth can be complicated. Tasks that fall to freelancers generally fall into two categories: work that people don’t like to do and work that people don’t understand how to do. I recommend doing some research. Check out freelancer marketplaces like UpWork and freelancer and see what similarly skilled folks are charging for their services. Make sure to take into account the other freelancer’s location and currency conversion when deciding whether their situation is comparable to your own.

When it comes to quoting, whether hourly rates or fixed price, determine a high goal and a basement price. Ideally you would only accept your basement price on an exceptionally large or valuable deal. Obviously some pricing consideration can be given when it comes to a client who’s willing to commit (in writing) to a large scale project. If you do fixed price work, determine a minimum viable project value and don’t submit proposals for less than that.

(As an aside: A general rule of thumb would never be to work on contingency or for a stake in a “growing company”. If a company can’t put together enough starter funds to pay you, then it’s almost certainly not one worth working for.)

How do I know I’m doing things right?

At the end of the day, ideally being a freelancer should give you a sense of control over your own destiny. After all, freedom is one of the biggest benefits of this work style (even if it is just another word for nothin’ left to lose). If you feel stressed, overworked, and underpaid while freelancing, it’s time to re-evaluate what you’re doing. You’ll almost never be in a position in the traditional working world to set your own wages, so feel free to experiment. See what works. Setting your prices high might mean less work, but it might also mean you attract less “price-sensitive” clients, who can be an enormous stress with little payoff.

Remember: it takes time for a business to become profitable and there will be a lot of missteps when you first begin. The best thing you can do is keep good records, set realistic goals, track your progress, and remember to take breaks and celebrate your successes. Good luck!

UpWork (oDesk/eLance)

Tracking down clients can be difficult, especially when you’re just getting started. Networking is a great resource, but why not go to where the clients are already searching? UpWork (formerly oDesk and in conjunction with eLance) is a great resource for all kinds of freelance work. It’s a global market place, so wages can be a little deflated (especially if you live in the US or the UK) but there are plenty of clients willing and ready to pay a fair wage for your skills. Build a great profile page and start applying–it’s free for the most part–and backed by lots of reassuring guarantees for hourly paid work. It also comes with a time tracker app built in–an essential freelance tool!

Toggl

If you’re working on your own (which most of us are) sometimes keeping track of hours can be tedious. I prefer to bill on an hourly basis for a variety of reasons, and as a result I want exact accounting of how I spend my time. That’s where Toggl comes in. It’s a light weight desktop and mobile app (for tracking on the go, a feature I love for answering e-mails on the train, for example) that tracks your time. Simple as that! At the end of your billing period (which you can determine as you see fit) you can create reports based on clients, projects, etc. You can get even more done with Toggl Pro, including billing clients directly from the Toggl interface. Pricing is competitive and my experiences with the support team have been excellent.

Acuity Scheduling

Both you and your clients are running businesses–maybe you’re in different timezones, on different schedules, who knows. Making time to check in via video chat or phone calls can be really difficult. Acuity Scheduling makes booking times easier. If you have a lot of clients you make time for on a regular basis, you can setup an Acuity account and open set times at which you are available. When one client books in, their time will become greyed out. No more accidentally scheduling two folks on top of one another!

Streak

Streak has been a game changer for me. My inbox is insane. I manage multiple POP accounts in addition to my primary Gmail all in the same space (maybe not the best choice, but I can’t bring myself to change my system…). With Streak you can track and organize your client e-mails from initial contact to making the sale. Doesn’t matter what your end goal is, really! You can always rename your “stages” that e-mails funnel through. You can “box” e-mails related to a project together, you can see which of your messages are still awaiting reply, you can even see when clients read your e-mails. This is just scratching the surface of what Streak can do, and the best part is the basic version is free.

Boomerang

There’s more e-mail efficiency tools where that came from! Burning the midnight oil, but don’t want to look like the type of person who sends work e-mails at 3AM? Use Boomerang to delay an e-mail’s send time until at exact time later or use fuzzy logic to send a message “tomorrow morning”. Not getting a response for an important message? Set it to jump back to the top of someone’s inbox a few days later if you haven’t received a reply yet. Boomerang is a little basic compared to Streak, but still a great tool.

Zapier

This is by far the most versatile of the freelance tools on this list. Got a task you need to automate? 9 times out of 10, Zapier can do it for you. You can check out some of their most popular “use cases” here, but honestly the sky is the limit. Great for capturing leads, scheduling follow up e-mails, populating documents, and almost anything to do with payment management. Some app integrations are considered “premium”, but generally the free version is sufficient for the average user. Need more? They’ve got a variety of monthly commitment levels available.

Buffer

We’re supposed to keep swimming in this social ocean or we’re going down, shark style, right? But maybe you don’t have time to hop on Facebook twice a day and constantly reload your Twitter feed. Stay active on social media without being constantly distracted with Buffer–sit down at the start of the week, line up some posts, and don’t think about it until next Sunday. Curb the addiction to your phone and spend some time in the great outdoors. (Or at least go to the cafe down the street?)

Are there any other apps you use to keep on task while working freelance? Let me know in the comments!