Question: when should you raise your freelancer rate? Answer: now.
Ok, let’s get a little more specific. Most of the freelancers we talk to always have a problem knowing when to raise their rates, and inevitably it means that they have been dragging their feet on doing so for months or perhaps years. Nine times out of ten, we see freelancers undercharging and a big part of this is because the numbers lie.
Here’s a recent article from Time celebrating how “lucrative” it is to be a freelancer today:
Thinking about freelancing? Turns out, it pays great. Freelancers in the U.S. make an average of $31 an hour, which comes out to 17% more than the typical full-time employed worker, according to a survey from Payoneer…. In the U.S., the average freelance rate outpaces a traditional 9 to 5 by a long shot. As of October 2017, median weekly earnings for full time U.S. workers was just shy of $45,000 a year, according to Bureau of Labor Statistics data. For freelancers, $31 an hour works out to about $64,000.
Raise your hand if you immediately see the error the author of this article is making. If you’re a freelancer, it’s obvious: she isn’t taking into account everything freelancers pay out-of-pocket.
The author extrapolates this $31/hour freelancer average rate to a salary of $64,000 a year and compares it to the average 9-to-5 salary of $45,000 a year. Let’s leave aside the fact that she’s most likely comparing pre-tax freelance dollars to after-tax salary dollars (because pre-tax 9-to-5 salary is closer to $67,565), which means freelancers are already making less overall. But even without that, what about health insurance? Retirement contributions? Paid time off? Office equipment? Heck, coffee? A freelancer has to pay for everything from his/her hourly rate. 9-to-5 employees usually have some perks and benefits in addition to their salary.
It’s insane how this Time article tries to spin things. More than that, it’s highly irresponsible journalism, if you can even call it that.
Freelancers are chronically underpaid because they settle for it.
So doing the math properly, we see that $31/hour is not close to being advantageous compared to full-time workers. This is because raising rates is difficult, if not downright scary. Remember, if a 9-to-5 employee asks for a raise, usually the worst that happens is getting a “no.” When freelancers do it, they can risk losing their clients altogether. So it’s easy to see why freelancers put off increasing their rates until it becomes severely limiting. That’s why the time to raise your rate is probably right now.
But it’s hard to overcome that fear of losing clients to cheaper competition which is the main factor that discourages freelancers from doing what they know they need to do. In many fields, it almost seems like a race to the bottom: no one wants to charge this little, but if you don’t, you won’t have any work. So if a freelancer wants to earn more but is unwilling to raise rates, the only option left is the one most take: work more hours. This is why reports say that full-time freelancers work more hours per week than full-time salaried employees.
This is the “easy” way out. It’s easier to work a few more hours than to have that painful conversation with clients about raising rates. But freelancers can only expand so much horizontally; there are only so many hours in the day to work. Eventually, freelancers have to expand vertically, by raising their rates, in order to realistically increase their take-home salary. So how can they do that?
Doing the tough work of raising rates.
Honestly, the how of raising rates isn’t difficult. You just start charging more. But it’s actually doing it that’s the hard part. There are many ways to go about it (and a million articles on how to do it), but it’s mostly about overcoming the fear and discomfort of asking. If you have all the confidence in the world, you probably have done it by now. For the rest of us, let’s approach this in the easiest way possible:
- Raise your rates for new clients. Avoid that difficult conversation altogether with your current clients. Just start charging more for any new ones. This is the ideal and easiest path, and the one we most recommend for freelancers who would rather work more hours than ask clients for a raise. Yes, it can be difficult if the new clients are direct referrals from current clients at a certain rate, but just keep this phrase in your back-pocket if they ask: “Yes, ________ are at a legacy rate, but my range has changed since then.”
- Move your goal posts. If you aren’t in the habit of offering a range of rates when you first negotiate with a client, do so. Instead of saying your rate is X/hour, say it ranges from X/hour to Y/hour. It’s generally good practice to do so anyway to maximize what you can negotiate, but having a range makes it easier to change your rates as well. Tack on five bucks on either end and you’ll have new clients in a higher bracket with ease.
- If you have to raise your rates with current clients, come armed with almost too much ammunition. Fighting inertia is tough, and it’s important you have a strong case to present. Ammunition can include:
- Expanded scope of the work you have taken on.
- Years have gone by without a rate increase.
- They are the one of the only clients you have left at this lower rate.
- The cost of the tools you need to use have increased.
On that third option, it’s always best if you are fairly sure that your contribution to that client would be hard to replace. If it’s no issue to swap you out with some other freelancer, it’s probably best to think of them as “legacy clients” and keep their rate where it’s at. At this point, you need to either phase them out once your other clients are at higher rates, or wait until you have the proper amount of ammunition.
Don’t let bad math on Time.com fool you. If you freelance, you probably need to charge a lot more per hour just to keep up with 9-to-5 employees. Think hard about where you want to be and take the steps today to raise your hourly rates.
The post Why You May Be Going Broke as a Freelancer and You Don’t Know it Yet appeared first on Billy Accounting.
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]]>I immediately blamed myself. I must be a poor planner, not anticipating that I had made more money than last year. Or maybe I hadn’t recorded the right numbers. Should I have communicated more with my accountant? Though I considered these and many other options, I would soon discover that the truth was far more interesting and enlightening.
I told my friend Jackie about the bill from the IRS and she suggested I should meet her friend Patrick. “He’s helped me save $3,000 on taxes last year!” she said. I was sold!
Four days later, I found myself at a coffee shop sitting across from Patrick, a financial advisor and tax attorney who used to work for the IRS. I assumed we would spend the first few minutes in small talk, but he got right down to business.
“I’m not surprised your tax bill is this large, given that you just threw away your receipt.” He motioned toward my steaming latte.
“What do you mean?” I asked.
Patrick reached into his wallet and retrieved his own receipt. “Think of this as money,” he said. “And my guess, without even looking at your records, is that you’ve been throwing away a lot of it.” This piqued my interest and I leaned in. “After all, isn’t this a work meeting?” he asked. I had to agree that we were meeting about my work expenses, but how significant could one little $2 receipt be? In what seemed like a detour he asked, “Tell me about your last vacation?”
“This past fall I went to Hawaii over Labor Day with my girlfriend.” I filled him in on the fun, 12-day adventure and answered specifics about our trip.
“Did you even consider writing that off?” he asked. I must have stared blankly at him because he started to explain that most freelancers don’t know how easily they can turn a pleasure trip into one they can deduct for work.
“I bet you didn’t know that with some advanced planning you could deduct your airfare, hotel room, rental car, 50% of your restaurant meals, and even some of your entertainment, like golf.” I shook my head. “In every place you might want to travel there are opportunities to promote and grow your business, so why not take advantage of them?”
“But what kind of a vacation would that have been if I was working all the time?” While his advice seemed financially interesting, I couldn’t imagine having spent those sun-drenched days inside slogging over work, not to mention how mad my girlfriend would have been.
Patrick held up two fingers. “Two days. Maybe for an hour each day. From what you’ve told me about your itinerary, that’s how much you would’ve needed to work to write off most of your travel expenses.”
“How is that possible?” I asked. He must have been used to that question because he quickly started to explain that if 7 out of my 12 days were considered business days then the trip was largely deductible. He could tell from my expression that this number sounded less appealing than the two days he had just stated, but he continued. “What most people don’t know is that travel days can be considered business days, so they contribute to that total, as do weekends and holidays.
I must have looked confused because he clarified, “That equals seven business days: the Monday you travel, the Friday you work, the weekend and Labor Day, the Tuesday you work and the Friday you travel.”
“You said I needed to work two days, even if it’s for an hour each day. What kind of work could I have done?” I was beginning to feel like he had just given me the key to some long lost treasure.
“Well, you’re a web designer. You could’ve arranged to meet with a prospect to discuss working together on Friday and on Tuesday you could’ve visited a successful web design agency to discuss referring business to each other. When you work on getting clients or learning new skills, your business benefits from it, and this is the basis to determine business days.
I was stunned! “Why isn’t everyone doing this?” I asked.
“A lot of freelancers are, in fact, taking full advantage of the tax code, but most others never bother to study it. I don’t blame them. It’s a huge, boring document, 10 times the size of the Bible! But if you want to win the game, it pays to know the rules.”
While Patrick let me digest what he had just told me, he reviewed the documents I brought and then looked up. “It seems like you’ve been overpaying your taxes by about $5,000 a year,” he said. “However, this is not free money. It will take a lot of diligence on your part if you want to put back in your pocket all you’ve been leaving on the table. None of this means anything if you don’t have a way to keep track of it all.” Though Patrick’s words seemed discouraging, I could tell by his demeanor he was about to give me some good news.
“Actually you’re making plenty of money. You just need to learn how to keep it.”
What I didn’t yet know was that I had been acting on some misconceptions that can derail the best efforts of many freelancers.
Three Myths That Keep Us from Saving Money
Five years after my conversation with Patrick, my business grew from a solo freelance web design shop to a 10-person, full-service digital marketing agency. One day, a successful entrepreneur told me he wanted to buy my business. At first, I told him I wasn’t interested in selling, but he made me an offer I couldn’t refuse and promised to keep all my staff, so I finally said “yes” and we got acquired in early 2015.
TMH was instrumental to this success, as it allowed me to keep the money I made and reinvest it in the business to accelerate our growth.
During the seven years I had my agency, I traveled six months out of each year and visited over 75 countries. While owning the agency meant I was no longer a freelancer, my travels put me in constant contact with those who had been like me, independents living their passions. I skied in Aspen with Karla, a photographer from Brazil, rode camels in Morocco with Danielle, a writer from Australia, went scuba diving in Greece with Antoine, a management consultant from Angola, and rode motorcycles in Vietnam with a German software developer named Klaus.
In my travels, I met hundreds of freelancers who shared my dream: being our own bosses, making our own schedules and working from anywhere. We all enjoyed the freedom that freelancing had given us to live our lives as we wanted.
While all of these freelancers were good at pursuing their passions, I realized through our conversations that most had never been taught how to keep more of the money they made. Though they came from diverse backgrounds and had differing skills, it seemed that the reason these freelancers weren’t taking advantage of the available tax deductions boiled down to three powerful myths:
Myth #1: My Accountant Takes Care of My Taxes
One of the mistaken beliefs that freelancers have is that at tax time our accountants can claim all of our allowable deductions, no matter what we do during the year. The problem is that part of the job of an accountant is to minimize our chances of being audited and having to pay penalties for undocumented deductions.
This means that if freelancers don’t work diligently during the year (each week in fact!) to record all of our work-related expenses, an accountant can’t use those deductions. In effect, we have tied the hands of the very person we’re paying to act on our behalf!
Let’s use an example from the first section of this book. Ultimately I was not able to deduct the Hawaii trip that Patrick and I discussed because it had already happened. This means I had not done the necessary work, in advance, to solicit work opportunities, nor had I saved any of the receipts and needed documentation from the trip.
For an even more common example, you may wish for your accountant to claim your work-related meals. But if you merely hand over a receipt, with no details, he or she cannot guess who you met with and why. It would be irresponsible of your accountant to rely on this limited information.
So the bottom line is that even though we’re paying our tax accountants to take all of the possible deductions, we’re failing to do the work they need in order to take those deductions. In the race to finish our taxes we pass them the baton, but trip them up along the way!
Myth #2: I Can Only Save a Few Bucks a Year
Not all freelancers I met were unaware that they were squandering potential deductions. Some chose to ignore them! The most common reason I heard for this was that they didn’t think it was worth the effort. In other words, they thought the hassle of keeping track of their expenses wasn’t worth what they might save.
The truth is many had no idea how much money they were forgoing. Sandy Botkin, CPA, former IRS tax attorney and senior tax law specialist, estimates that people often leave about $4,000-$10,000 on the table every year.
Even if you’re not currently making a lot of money, business losses can be used to offset other income, including that of your spouse, and can be carried forward for up to 20 years. So, if you find $4,000 in deductions but you only made $500, you have $3,500 in tax credit that you can use against your other income, your spouse’s income, or the future income of either one of you. If more freelancers knew how much money they were leaving behind, they might find a few minutes a week well worth the effort!
Myth #3: Taxes Are Done Once a Year
If you’re an employee, you fill out a form when you’re hired and by January 31st of each year you get a W-2 to give to your tax preparer. Easy! So it would make sense that many people feel that tax time only rolls around once a year. But what if you work for yourself?
There are actually two tax systems in the United States. When I tell freelancers this, they rush to say: “I know! One for the rich, and one for the rest of us.” However, that’s not the case. The two tax systems are the one for employees and the one for business owners.
As you saw in the first section, it turns out that the tax code for freelancers is quite appealing. In America, we promote entrepreneurship by allowing business owners to deduct meals, travel, car expenses, home offices, etc. However, getting all these tax deductions takes a little work. You can’t just write down “Trip to Hawaii – $4,000” and expect a deduction.
The IRS has very specific guidelines on how you need to document your business expenses. They need a certain level of detail (which I’ll cover in the next section) and they need to be recorded in a “timely manner” (weekly is ideal).
Accountants, tax preparers and bookkeepers tend to err on the side of caution and won’t claim deductions that can’t be proven because they can be on the hook for penalties. They don’t want to expose themselves or their clients to this risk.
Business owners need to capture receipts as quickly as possible so their accountants can file accurate and complete tax returns, and get as many deductions as possible.
Randy Johnston, CPA and one of the Top 100 Most Influential People in Accounting
The IRS tax code is a whopping 80,000 pages (10X the size of the Bible) and the IRS is not in the business of helping you lower your tax bill. It’s your job to learn the rules of the game and make sure your expenses are recorded in a timely manner.
Now that I was enlightened about these myths, I only needed to learn how to act on this new information. What did I have to do to make sure I took full advantage of all these potential savings? The answer was a 15-minute weekly habit that would forever change how I managed my finances.
This blog post is an excerpt from the book The Wealthy Freelancer. To download the book, which includes a detailed step-by-step of The Money Habit go to www.billyapp.com/TheWealthyFreelancer
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