3 principlesAs 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.
Invoice per hour
This is how you arrive at an hourly rate. Follow the four steps below. Or watch the video 'Calculation example of your hourly rate' ('Rekenvoorbeeld van je uurtarief', in Dutch).
Step 1: the business costsThere 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’s use 11,150 euros 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 euros net per month. To live on, but also to save and for your pension accrual. That is 21,000 euros per year. In addition, you reserve 8% for your holiday: 1,680 euros. You therefore need a net income (after deduction of income tax) of 22,680 euros per year.
TaxesAs 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 contributionIn addition to your monthly health insurance premium, you also pay an income-related health insurance contribution of 5.75% of your net profit. So, to earn 22,680 euros 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||€2,030||5.75%|
|Required net profit||€35,300||100%|
Step 3: required turnoverThe turnover you need should be enough for:
- the business costs (step 1);
- the desired income, taxes and insurance contributions (step 2).
Step 4: the hourly rateHow many hours do you think you will charge per year? If you assume a five-day working week and thirty days for holidays and days off, you will have 230 days in the year to work. That's 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 (46,284 euros / 920 hours =) 51 euros. You calculate 21% or 9% VAT over your hourly rate of 51 euros, depending on the nature of your service. Or you use a VAT exemption or reverse charge scheme.
Additional costsIn 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.
- Work with a variable rate. You charge a higher rate for an urgent order. With a longer, permanent assignment, you give a discount.
- Review your hourly rate annually. You may need to increase your hourly rate.
- 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.