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 want

  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. Let us use €11,150 in business costs as an example.

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

Suppose you want to end up with €1,750 net per month. To live on, but also to save and for your pension accrual. That is €21,000 per year. In addition, you reserve 8% for your holiday: €1,680. You therefore need a net income (after deduction of income tax) of €22,680 per year.

Taxes

As an eenmanszaak, you pay income tax on your profit. You may be eligible for an entrepreneur's allowance or an SME profit exemption. This means you pay a lower amount of tax. To be safe, you reserve 30% of your net profit for the payment of income tax.

Health insurance contribution

In addition to your monthly health insurance premium, you also pay an income-related health insurance contribution of 5.32% of your net profit.

So, to earn €22,680 on an annual basis, take a look at the following calculation*:

Income tax and income-dependent health insurance contribution together are 35.32% of your net profit. This leaves 64.68% of your net profit as income for you. In this example, that equals €22,680. Calculate this back to 1% (22,680 / 64.68= 350.64) and multiply the result by the percentages of net profit, income tax and income-dependent health insurance contribution. You now know what net profit you need to make and what amounts you should set aside. 

* Personal circumstances have been disregarded in this example

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).

The necessary turnover in this example is: €11,150 + €35,064 = €46,214.

Step 4: the hourly rate

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. In our example, with 50% billable hours you arrive at an hourly rate of (€46,214 / 920 hours = €51). You calculate 21% or 9% VAT over your hourly rate of €51, depending on the nature of your service. Or you use a VAT exemption or reverse charge scheme.

Additional costs

In addition to your hours, you have to deal with costs that you will make for your customer such as travel costs. You can charge these. Make agreements about this in advance. Include in your general terms and conditions or contract which costs are and are not included in your rate, or will be charged separately. This information should also be included in your general terms and conditions or contract. This prevents problems later.

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.