Note: The numbers in the below have been updated for 2020.
In my work I find myself talking to a lot of new freelancers as well as local businesses looking to hire freelancers for the first time, and almost universally their first question is "Where do I find clients/freelancers?" Luckily, there are plenty of resources available that not only tell you how to find freelancers or clients, but actually streamline the process of choosing and hiring.
The second question I usually get from new freelancers or expanding businesses is "and how do I charge/pay them?", and unfortunately there is not a lot of good, solid, numerically-explicit information on this topic. I feel like that is primarily based on a lot of fear.
As contract workers, we are afraid of working too much and not earning enough; as business owners, we are afraid of paying too much and not making enough. As both, I can say that they are equally valid concerns. However, this should not keep contractors and business owners from communicating with each other about our needs and expectations.
No one I work with, on the business side or on the freelance side, wants to live in a world of scarcity. No one wants people to be unable to support themselves or their families and employees. No one wants anyone to be stressed, frantic or over-burdened, least of all the people we work with.
Rule of thumb
In order to pay people enough to do good work, I recommend paying a base minimum of twice as much as you would pay an employee to do the same job. Then, increase that number exponentially based on years of experience and professionalism.
The reason we pay twice as much is because freelancers routinely pay 40-50% of their income to taxes, supplies, and healthcare costs. The reason we increase exponentially is because potential returns increase at the same rate based on experience and professionalism. A new freelancer is still learning their own process. For every level they advance in terms of experience and professionalism, they bring their clients exponentially higher returns.
When years of experience and level of professionalism contradict, look for another freelancer. But, if you insist on hiring someone whose experience isn’t roughly commensurate with their level of professionalism, I recommend you pay them based on their professionalism.
If you have never hired a freelancer to do this kind of work and you're not sure what you would pay them if you did, I have made a table to help you establish your minimums. This is the absolute minimum a decent employer would pay a contract worker based on their experience.
How to apply the contractor pay table
Start with the minimum based on the level of professionalism and experience you perceive your contractor to have. Then, increase the rate based on attributes such as:
- their years of non-contract experience in the industry
- specialty degrees and certifications (M.D., J.D., etc.)
- industry averages
- other professional benchmarks like awards, clients, and the things you personally look for in an ideal contractor (ex: cultural competencies, complimentary work habits etc.)
Contractor Pay Table (Updated for 2020)
Remember, this is the absolute minimum you should pay someone with this level of experience
|Absolute Minimum||Beginner (0-1 year)||Startup (1-2 years)||Established (3-5 years)||Experienced (5+ years)||Distinguished|
Absolute Minimum: This leaves the contractor with about $12 per hour in their pocket after taxes. Anything less than that would be inhumane. This rate is reserved for completely untried contractors in their first six months of working with them. If you have someone you're paying $25 an hour and they are not worth $35 in the first 6 months, and $50 after their first year, you should let them go and hire someone who’s will offer a better return on investment.
Beginner: Contractors with less than 1 year of experience are just getting their bearings. They are just learning about their own process, and may even be figuring out whether or not this is the right move for them. They are completely unreliable in terms of long-term availability or project success.
Startup: Most contractors quit in the first two years. Hiring someone who has less than two years of experience under their belt means that they may not be around in 5 or 10 years when you need to continue the project or make a new version of the thing they made you. Their product is still somewhat unreliable because their attention is divided between their service and being a start-up.
Established: Established contractors have documented processes and campaign success under their belt. They are far more likely to stay in business long-term, and they are mostly reliable. They may have sub-contractors they work with, but they are the primary point of contact for their clients. They should have some published work to refer to, even if that's just a blog or podcast.
Experienced: Experienced contractors are similar to established contractors, only more so. Their processes are fully documented, their product is completely reliable, and they are professional and easy to work with. They frequently have their own team, but they are available for their clients. They speak at conferences occasionally; they have a book or a popular blog or podcast.
Distinguished Contractors: Distinguished contractors are the top 3% of their industry. They are regularly asked to speak at conferences, they have published books, and they have industry-wide, nation-wide and even world-wide name recognition. Their processes are the most reliable in the industry. They have a large team, and although you probably won't be working directly with them, their name recognition alone opens doors that would be closed to other contractors.
A note on project rates
Most professional service providers (myself, for example) won't take hourly work from new clients after their first year or so in business. Instead, they sell packages and projects.
For some contractors, projects and packages are based on a percentage (usually 10-20% but sometimes as much as 50%) of what they expect their client will make off their professional services for the first year that they are implemented. Many people believe this is the ideal pricing structure for both client and contractor.
Unfortunately, in order to appropriately employ return-based pricing, the process has to be very reliable. Since every client is unique, this kind of reliability can't be guaranteed in the first six months of a new client, a new process, or new parameters. Some contractors who use this pricing will counteract this by restricting their client-type, on-boarding a lot of clients, and quickly off-loading anyone for whom the process is not working. For the clients that experience success with this process, it is extremely rewarding.
Most businesses are constantly experiencing significant changes in processes and parameters, so most contractors will employ a combination of return-based and hourly-based pricing for their packages.
A contractor will assess how many hours it will take them to accomplish the associated tasks, and then quote the client an amount based on this hourly commitment. If an immediate, quantifiable return is a sure thing, sometimes the contractor will add a percentage of the lowest possible return estimated.
Some contractors will say that they don't base their rates on an hourly rate at all; that they base them on operating costs. This is an accepted and respected billing logic, but it can also be broken down by hours for comparison purposes.
How the table will work in your business
At the end of the day, we have to feel like the amount we pay is worth the work we get, or no table will help us. I wrote the table with the expectation that the person who uses it will believe, as I do, that all people deserve to be paid a living wage for their work. I live in Portland, there the minimum wage is $13, and I am one of the many business owners in the state who fervently supports the $20 minimum wage.
I use this logic to pay my own contractors and I can honestly say that paying people has become a joy. There is a framework behind why I pay what I pay, there is an expectation based on rate of pay, and when I pay invoices I feel relieved that this work is being done for me by people whom I trust to deliver.
I believe that no one wins an unbalanced deal. If I "get away" with paying a valuable contractor less than their value, I'm cheating myself more than the contractor. I also believe that, as I support newer contractors and encourage them to develop professionally, their work may become worth more than I can afford to pay. That's something to celebrate and I would never want to hold anybody back by demanding that they stay in my price range because they're growing faster than I am.
We are encouraged to be afraid of losing people, or money, or both, but I didn't build this business to be afraid. I built it to make things better and create connections, which is the opposite of fear. So, when you use these parameters to hire your freelancers, know that I wrote them in order to ensure that everyone involved was treated with respect, and given the best possible results for their level of investment, and please use them in that spirit as you go forward.