“How much should I charge?”. It’s a question I hear often from clients. Deciding what rates to charge and figuring out to charge what you are worth have many moving parts. Here’s how to reverse engineer it.
How Much Should I Charge? – Transcript
Hello! Hello! Hello!
It is Kelly Harrell here with Money Tree Academy.
And, it is a beautiful day here in a New Mexican desert today so I thought I’d do this… kick off this 21 Day Facebook Live Challenge that someone has challenged me to. So for the next 21 days, I’m going to be sharing information about money, the money tree and the women’s relationship with money.
Today, I’m going to be answering the question “How Much Should I Charge?”. So often when clients come to me with lots of money challenges going on, there is an undercharging effect that is happening. They’re undercharging for the brilliance that they bring to the table.
And, when we don’t understand all the factors that go into setting appropriate rates for ourselves, it can relate to a whole lot of issues that can happen down the line. Just a few of them would be that you’re not well-rewarded for the brilliance that you bring to the table. We all deserve to be well paid for the work and the brilliance and the skills that we develop over our lifetime.
The second thing can be… you will be demotivated to… about offering the kind of work that you do to even more clients. Energetically, you know if you’re getting underpaid and it never feels good for anyone. It does not bring out your best self.
The second thing or the third thing is that you can have a lot of money stress. If you’re being underpaid and you’re not able to pay your bills, that doesn’t feel good to anyone and that is not going to inspire your creativity and make you a more generative and generous business person.
So let’s just look at how do we set the correct kind of rates for our business? And, probably the best way to go about that is to reverse engineer it.
How Income Goals Factor Into ‘How Much Should I Charge?’
A great starting place for a person is to look at 3 different points of what kind of income you’d like to make.
The first one should be like your emergency level—what do you have to make? What is like the base amount of money that you’d have to make to be able to cover your core expenses? Like if you can’t pay these things, the wheels are going to fall off your bus. So whether it’s your mortgage? Your business? Just all the expenses that go into that—What do you need to eat? What do you need to pay for healthcare? What do you need to just be able to really survive? And I’m not talking like so super bare-bones that you’re completely in austerity measures, but a step or two above that. Just like what is the basic core?
The second level of income that I’d like you to figure out is what would your monthly cost would be ‘what is enough’? What does it take to live a pretty good life—where you have enough to pay all of your bills, you can afford Netflix, you can go out to eat sometimes, you can take a trip here or there. Something that actually feels really good and healthy. And it’s enough. It allows you to meet your health goals, your retirement savings goals. That should be your enough level.
The third level of monthly expenses that you might want…or monthly income that you might like to put out there is what would be ideal, what would feel incredibly abundant and allow you to do just about anything that you wanted to do. That would be a third level to plot out for yourself.
So that’s the first step. Figuring out what that would be for you on a monthly basis.
How Billable Hours Factors into ‘How Much Should I Charge?’
Now, the second step is looking at how many hours are you able to bill or work per week. So billable hours is not the same as how many hours you work. As a business owner, you have to wear many different hats, and many of those hours are not billable. If you only look at the paid hours you do and value that, then you will come up short when you ask yourself ‘how much should I charge?’. So what is the number of billable hours that you can charge for realistically? And, take that number.
Now, you’ve got your billable hours, and you’ve got the types of income, the 3 levels of income that you would like to earn. And you can divide those levels of income by those billable hours so that you can come up with what you need to have as a profit, what you need to be able to take out of the whole game to achieve anyone of those 3 levels before any other cost come into consideration.
So now you have that, you know what profit levels you need to achieve. So on top of that, though, and here’s where a lot of people really miss it. There are couple of other factors that you need to be taking into consideration.
How Business Costs Factor into ‘How Much Should I Charge?’
One is what are your hard business costs?
You have internet to pay for, you’ve got office supplies, printing ink cartridges, vendors, website hosting, email subscription services. You probably outsource your work to a website designer or maybe you have a virtual assistant or a number of other things. Maybe a web programmer. So all of those are hard costs that you have for running your business. So you need to take a consideration what those hard costs are and one of the fastest ways to figure out what that is, is to look at last year’s tax return.
If you’ve filed a tax return and you itemized expenses including for your business, and you have a Schedule A in there, just look at what your Schedule A amount is—those were all the expenses that you charged to your business. Now, divide that by 12. If you think that this year will be around the same amount of cost, and output for your hard cost, be it for office, heating, cooling, and whatever else, then you can go ahead and just add that number unto the amount that’s unto the hourly rate that…or turn it into your hourly rate divided by however many billable hours you have. And there, you have now what your hard costs are on a billable hour hourly rate.
I don’t think I made that all that clear but… so take your hard costs for the year divide it by the number of hours you anticipate working this year. So if it’s… if you plan to work 50 weeks this year and taking a couple of weeks off for vacation or maybe 48 weeks this year divide it by 48 then divide it by the number of billable hours that you have each week. And that should give you your hour billable rate or your hour rate for the hard costs on your business.
How Taxes Impact ‘How Much Should I Charge?’
Now, here’s the other aspect, taxes. Oh yeah, they are not a sexy thing but they don’t have to be super intimidating at all. And so, knowing what your tax rates are, is really key to being able to set your rates correctly. So one of those things is knowing your federal rate. And, how do you figure that out?
Well, if you go to… again, going back to last year’s tax return, if you go to line 43 on your Form 1040, that’s what the first two pages of your tax return.
On your Form 1040, line 43 will show you your taxable income. Now, just go to trusty ‘ole Google and type in your last year, so 2016, put in tax brackets, “2016 tax brackets”. And that would apply if what it’s called if you’re here in the United States. 2016 Tax Brackets. And look for the tax bracket that applies to your taxable income amount. That would be your tax rate.
Now, if you’re still starting out in business, that’s probably around 15%. If you have more established in your business, it’s 25% or above. So let’s take the 25% tax rate as an example. So that’s the federal tax rate that you’re going to pay out of anything that you charge on all new incomes that you earn.
Now, there’s another piece to that. If you are in a state – not a state like Texas or Washington who don’t have state income tax rates – but if you’re in a state that does charge income tax, you have to add that in as well.
So in my state, it’s 5 percent. Well, 4.9%. So that has to be added on to our example of the 25% tax bracket on the federal level. So now, you’re about well, it would be like 29.9%. So let’s just say 30% to keep it easy.
So now, you’re up at 30%. Additionally, you need to add in your OASDI taxes. OASDI is Old Age, Survivors, and Disability Insurance. That basically is comprised of your Medicare taxes and your social security taxes. That amount is 15.3% tax rate.
Now, when you work for an employer, it’s half that. When you work for the employer, your employer pays half of that 15.3% and you pay half as the employee. But when you’re self-employed, you play both of those roles. So lucky you! You get to pay both of those amounts. So 15.3%.
So now, using your example, we have 25% federal, 5% state, and 15.3% OASDI. So now, we’re looking at over 45% in taxes. That has to be figured into what your billable rate is going to be. Right?
Think about that when you’re setting your rate. Are you… when you set that rate, is it going to allow you to survive? If you’re in a really competitive thing and you just desperately need the business and you’re willing to undercut, then make sure that you cover those taxes no matter what.
If you’re on enough, if you’re going for the enough model, again, make sure those rates are plentiful enough that you will be able to achieve that. Now, let’s say you really want to go for the more ideal numbers.
The first two ways bare-bones and then enough are obviously… just thinking about that way is not expansive enough and some of you are ready to really blow those rates at a much higher level. And the areas… when I’m working with clients, centers around who are you serving? Who is this client base that you’re serving? What is the core of their need? Where… how does what you bring to the table really serve deeply to that need? What is the return on the investment that they get by working with you? Does it transform their health? Does it transform their time? Does it transform their financial wellbeing? Does it transform their confidence, their dating? I mean, what is it that you do that helps that client transform?
Looking at who you serve, what you offer, how you package it (packaging can take you way beyond just the billable hour and put you into package rates that can really free up your time and that’s a whole other approach that we won’t go into here). How you show up, and how alignment, in alignment you are with your genius and with the need that’s out there in the marketplace. All these things factor into the ‘How much should I charge’ equation. These are all things that can take a person well beyond just the – I have to have needs survival type billing, and the – I have enough to live a decent life type billing.
So you can learn more about that perhaps by joining me with my next group that will be starting in August. And, we don’t have a Facebook page up or any kind of page up on that on my website just yet, but if you’d like to learn more and consider joining me, and again, for women only though. If you’d like to consider joining me in my next group, which will be running around mid-August, go to my website at www.moneytreeacademy.com and go to my contact page. Drop me a note.
Again, it’s Kelly Harrell with Money Tree Academy. Thanks for joining me.