What does your ideal business look like? No matter what kind of business you run, you’ll have to deal with the issue of pricing — for products, for services, for advertising… for whatever you’re offering. But selling consulting or freelance services can pose unique challenges.

I’ve worked with solopreneurs for most of my career (mostly freelance writers through one of my web properties — All Freelance Writing — but also working with independent and creative professionals through my own freelance writing and PR consulting).

Pricing is a common issue I see these folks struggle with. And the problem is you often won’t know you’ve made a pricing mistake until long after it’s cost you significant amounts of money or has pushed you near the point of burnout. I’ve watched it keep freelance writers in particular years behind where colleagues with similar credentials are income-wise. I’ve even known freelancers who quit because they spent so much time under-earning that they exhausted savings or simply became discouraged.

This is often a result of faulty assumptions and misunderstandings, especially among new service providers who have only had to think about earnings in terms of traditional salaries before. So today let’s look at some of the basics of setting freelance rates or consulting fees, so you don’t make simple mistakes with the potential to hold you back.

Here’s what you should consider before setting your professional rates:

Know What You Need

Before setting freelance or consulting fees, know exactly what you need to earn throughout the year (in net terms). Figure out your personal expenses, any money you want available for savings, emergency funds, or large purchases, and any other personal expenses you can think of. Ultimately, your net income will need to cover this, so you need this starting figure.

Understand Salary vs Cost

A freelance salary does not directly equate to a similar employee salary. Don’t underestimate what you’ll need to earn by thinking a low overhead means you don’t have to account for expenses.  Freelancers will pay for their own insurance, they pay additional taxes (in the US at least), and there are day-to-day expenses of running a business (even from home).

Don’t simply think “I earned $50,000 at my day job, so I need to earn the same as a freelancer for all things to be equal.” You’ll set yourself up for failure.

To be in an equal situation to your full-time job, you don’t need to match the salary; you need to come closer to matching your “cost” as an employee to that employer. Salary is only one part of it. The employer also paid a portion of your taxes that you’re now responsible for. They might have put money towards your retirement or health insurance. They paid for your basic office necessities. They paid your bonuses.

Think about how much money it cost that company to hire you to do your job, and that’s what you need to try to match with a freelance income. It may be a large difference.

Years ago I searched for this information at Salary.com for my specialty in my local area. I’ve periodically checked that over the years to see if anything’s changed. What did I find? As a freelance professional, I had to earn 30-40% more than a similar employee’s salary in order for other things to be equal.

In other words, if someone doing my job as a traditional employee was earning $100k per year, I’d have to earn $130k-140k as a freelancer to end up with similar net “take-home” pay.

Know that All Hours Aren’t “Billable Hours”

Sometimes service providers set their rates based on an expected 40-hour work week. For example, let’s stick with the round goal of $100k. Someone might assume they would figure out an hourly fee to reach that rate by dividing that total by 52 weeks per year and then again by 40 hours per week (which comes to approximately $48 per hour).

That would be a mistake though.

In reality, you have “working hours” (40 hours per week in this example), and you have “billable hours” (the hours you can actually bill clients for, not counting admin, financial work, marketing, etc.).

If you spent two-thirds of your working time on billable hours, you would need to charge around $71 per hour.

It’s not enough to set your goal. You need to know how much of your time you can directly charge for in order to reach that goal.

You Won’t Always be Working

We still have a problem with our above example. It’s based on 52 weeks per year. Almost no one will work a full week every week of the year. You need to account for time off – holidays, vacation time, and sick time,.

Let’s account for seven weeks off for this example between holidays, vacation time, personal days, and sick time. We’re now down to 45 working weeks in the year. That $100k goal now gets divided by 45 weeks rather than 52.

Again, we’ll assume two-thirds of your working hours are billable hours (or around 27 hours each week). Now your target rate would come to $82 per hour.

You Have to Account for Down-Time

If you’re new to freelancing or consulting, you can’t generally assume that all of your available billable hours are going to be filled every week. You’ll very likely have slow times.

You can account for this by adding a buffer to your rate, such as tacking on 10% to your base rate.  That would now take us to an hourly rate estimate of approximately $90 per hour for our example.

Factor in What You Want

All of those things simply help you find out what you need to charge to earn the same as you did in a full-time job. Anything you want to earn over that now needs to be tacked on.

For example, perhaps you feel that you were worth more than your company paid you. Or maybe you want better insurance or more for savings and retirement. If your experience and credentials (not to mention marketing abilities) back up an increase to earn what you want instead of what you simply need, then by all means, increase that hourly rate. You just don’t want to go below it.

If you need help, you can use a freelance rate calculator I have available on my freelance writing site. While developed for freelance writers, it will work just as well for any type of freelancer charging hourly rates for services. There’s a link near the top of the calculator that will take you to an advanced version if you don’t already have a target yearly income goal.

Only you know what you need to earn to be both happy and comfortable in your career. But understand that if you underestimate what you need to charge to reach your goals (or overestimate the billable hours you have available to help you reach that goal), fixing those mistakes later can be tricky.

The rates you charge are tied closely with your target market. And if you drastically under-charge, raising rates to where they need to be later could put you in an entirely different market. That can feel almost like starting over from scratch. So set rates that work for you and the kinds of clients you want to work with. But go into that decision with your eyes open, and you’ll save yourself headaches and frustration later.

This post was originally featured on July 11, 2008. It was updated and expanded on its currently-listed publication date.