Determine your hourly rate

3 principles

As an entrepreneur, you determine what a good hourly rate is. When determining your hourly rate, take into account:

• The income you need

  Determine the minimum amount you need per month to live on and pay your bills. Your hourly rate, after deduction of business costs and taxes, must be sufficient to end up with at least this amount.

• The hourly rates of competitors

  If your rates are way above or below your competitors’ rates, you have some explaining to do to your customer.

• The law of supply and demand

  Is your service in great demand, and are there few competitors who can do what you can? Then you can ask for a higher hourly rate than when you are the umpteenth with the same activity.

Step 1: the business costs

There are fixed and variable costs. Such as administration costs, inventory, selling and representation, car, interest, depreciation, and insurance. 

Step 2: how much do you want to end up with?

Determine the amount you need per month for your private expenses. Retirement savings and disability insurance costs are also private expenses. Also take into account money you have set aside, for when something breaks down at home or to pay for your holiday. You need the total of these amounts as your net income.

You need more than this amount from your business, because you also have to pay income tax and the income-related health insurance contribution.

Income tax and health insurance contribution

You pay income tax on profits from your sole proprietorship or your profit share as a partner in a VOF (general partnership). You may qualify for entrepreneur allowance or SME profit exemption. As a result, you pay a less tax. You pay income tax once a year. Set aside enough money for this.

You can calculate the amounts to be paid for income tax and health insurance contributions using the ‘Calculation tool for calculating hourly rates’ in the text below.

Step 3: required turnover

The turnover you need should be enough for:

1. the business costs (step 1);
2. the desired income, taxes and insurance contributions (step 2).

Step 4: billable hours

How many hours do you charge your customers per year? If you assume a 5-day working week and thirty days for holidays and days off, you will have 230 days in the year to work. That is 1,840 hours.

But you do not send an invoice for all those hours. You also spend time on acquisition, networking, administration and brainstorming new ideas. As a starting entrepreneur, you should be satisfied if you can charge 50 to 60% of those 1,840 hours.

Additional costs

Besides your hours, you incur expenses for your client. Think of travel expenses. You can charge these to your client. Agree on this in advance and discuss whether these costs are included in your hourly rate or will appear separately on your invoice. Include in your general terms and conditions or contract which costs are and which are not included in your rate. This prevents problems later.

Turnover tax

You charge 21% or 9% VAT on your hourly rate and additional costs. The rate depends on the nature of your service. Or you use a VAT exemption such as the small businesses scheme (KOR) or a reverse charge mechanism..

Alternatives to hourly rates

An alternative to an hourly rate is a fixed project price. Here, you set a final price for a project, package, process or method. Your customer pays for the end result. The hours you spend are your own responsibility. You can, for example, choose to outsource (part of) the work. Set out which activities are covered by the assignment and which are not.

For recurring work, you can opt for a subscription. Your customer pays a fixed amount per month, quarter or year, and you deliver the agreed service or product.

The purpose of a fixed project price or a subscription is greater income security. And you know in advance what and when you have to deliver. This makes it easier to plan your work.

Tips

• Work with a variable rate. You charge a higher rate for an urgent order. With a longer, permanent assignment, you give a discount, or include something extra in the price.
• Do you want to adjust your hourly rate according to the price development in the market? Use a CBS price index, for example the consumer price index (CPI). The price index indicates the price development compared to a previous year.
• You should review your hourly rate at least once a year and more often if there are major changes. For example, a sharp rise in energy costs and raw materials. This will force you to increase your hourly rate from time to time.
• Negotiate effectively with your clients.
• Get help from a bookkeeper or accountant via NOAB (in Dutch) or NBA (in Dutch) if you find it difficult to set your rate.