Determine your hourly rate
- Marty Zanen
- How to
- 24 May 2023
- Edited 5 Jan 2023
- 4 min
- Managing and growing
Determining your hourly rate is not that easy. A high rate scares off customers, but a low one may yield too little income and may undervalue your qualities. How do you set the right rate?
As an entrepreneur, you determine what a good hourly rate is. When determining your hourly rate, take into account:
The income you wantDetermine the minimum amount you need per month to live on and pay your bills. Your hourly rate, after deduction of business costs, must be sufficient to end up with at least this amount.
The hourly rates of competitorsIf your rates are way above or below your competitors’ rates, you have some explaining to do to your customer.
The law of supply and demandIs 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.
Determine your hourly rate
This is how you arrive at a hourly rate. Follow the four steps below. Or watch the video 'Calculation example of your hourly rate' ('Rekenvoorbeeld van je uurtarief', in Dutch). For English subtitels to the video above, click the settings wheel, click ondertiteling and select English.
Note: In the video, the income-related health insurance contribution is still calculated at 5.75%, the rate of 2021. In 2023, this contribution is 5.43%.
Video: Example of how to calculate your hourly rate
Step 1: the business costs
There are fixed and variable costs and start-up costs. One of the largest expenses is the rent of an office or other work space. Unless you work from home. In addition, it is wise to get insurance. You may also be faced with costs for administration, 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.
As an entrepreneur with a sole proprietorship you pay income tax. 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 5.43% of your net profit. So, to earn €22,680 on an annual basis, you must take that amount and count it as 64.25% of your net profit. You can then do the following calculation:
|Items||Amount||% of net profit|
|Income-dependent health insurance contribution||€1,907||5.43%|
|Required net profit||€35,124||100%|
Income tax and income-dependent health insurance contribution together are 35.43% of your net profit. This leaves 64.57% of your net profit as income for you. In this example, that equals 22,680 euros. Calculate this back to 1% (22,680 / 64.57= 351.24) and multiply the result by the percentages of net profit, income tax and income-dependent health insurance contribution.
* Personal circumstances have been disregarded in this example
Step 3: required turnover
The turnover you need should be enough for:
- the business costs (step 1);
- the desired income, taxes and insurance contributions (step 2).
The necessary turnover in this example is: €11,150 + €35,124 = €46,274.
Step 4: the hourly rate
How many hours do you think you will charge 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 don't 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 (€46,274 / 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.
Hourly rate calculator
Use the KVK hourly rate calculator. It allows you to calculate your hourly rate based on a desired net income.
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.
- Work with a variable rate. You charge a higher rate for an urgent order. With a longer, permanent assignment, you give a discount.
- Do you want to adjust your hourly rate according to the price development in the market? Check CBS, 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 look at your hourly rate from time to time.
- Negotiate effectively with your clients in the last step of your sales process. In this video we give five tips (in Dutch).
- Get help from a bookkeeper or accountant via NOAB (in Dutch) or NBA if you find it difficult to set your rate.