Ever wonder why your business bank account isn’t as full as it ought to be even though you feel like you’re charging SO MUCH? That’s because what you charge isn’t actually what you make. To figure that out, you need to understand your internal hourly rate.
In this guide, we’ll go over what internal hourly rate is, why it matters, and how to calculate it for your business.
What Is Internal Hourly Rate?
Your internal hourly rate is what you take home per hour you work. That’s after taxes and expenses come out. Internal hourly rate is calculated with your total time spent working, including marketing, prospecting, admin, and other unbillable work.
For example, let’s say you bill a client $500 for a project that takes 5 hours to complete. Your billable rate would be $100/hour. But you also spent roughly 5 hours on general marketing for your business, the sales call, and writing the proposal for the project before you started. So your internal hourly rate would only be $50/hour.
Your internal hourly rate can be both prescriptive and descriptive. If you calculate what you want to be making per hour worked and compare it to what you’re actually making per hour worked, you can quickly understand how well your business is doing. It’s not the only metric that matters, but it’s an easy and informative one.
Why This Internal Rate Matters
Your internal hourly rate is an objective benchmark that helps you:
- set your project prices
- make decisions like hiring team members or investing in tools and process improvements
- decide if freelancing is really worth it compared to being employed or doing whatever else you want to do with your time
It’s easy to base your freelance pricing on emotions, but I think we need to make business decisions based on our values instead. And data like your internal hourly rates can support those values, even when your emotions are screaming that you’re an imposter, how dare you charge that much.
So let’s figure it out, once and for all.
How to Find Your Internal Hourly Rate (2 Ways)
Like I said earlier, your internal hourly rate can reflect both your ideal and your reality. Here’s how to calculate both.
Actual Internal Hourly Rate
To calculate your actual internal hourly rate, find the amount you earn in a certain period of time or for a specific project. Subtract actual expenses and estimated taxes from that. Now divide the remainder by the number of hours you worked in that period or on that project.
(This can get a little messy with delayed payment terms (which is why they suuuuck), but generally, if I’ve billed for something, I count it as income for that time period or project even if the payment hasn’t hit yet.)
For example, let’s say you earned $2,500 in a month after taxes and expenses. During that same month, you worked 40 hours on business-related activities: the work itself, marketing, sales calls, answering emails, writing proposals, all that good stuff. So your actual internal hourly rate would be $2,500 divided by 40, which is $62.50/hour.
Ideal Internal Hourly Rate
Now let’s flip the equation around. To calculate your ideal internal hourly rate, take how much you want to earn per week, month, or year. Divide that by the number of hours you want to work during that time period.
For example, imagine that you want to match your previous salary of $50,000/year. Let’s say you also only want to work 15 hours a week and give yourself 12 weeks of vacation time per year for a total of 40 work weeks. (Because isn’t that the whole point of freelancing?? It doesn’t have to be, but that’s what I hear most often, so…)
To get there, you’d need an internal hourly rate of $50,000/year divided by 40 work weeks/year divided by 15 hours/work week. Your ideal internal hourly rate in this scenario would be $83.33/hour.
IMPORTANT CAVEAT: I actually don’t recommend just plugging your last salary into this equation, or choosing a random aspirational number out of thin air. For starters, when you’re an employee, you probably get benefits and you get paid for every hour you’re on the clock. When you freelance…you don’t.
Even if you choose a big fancy SiX-FiGuRe number, when it’s not tied to your actual lifestyle and values, it can be harder to stick with rates that seem scarily high. Instead of plucking a number from your ass, consider your true cost of doing business and cost of living. Look at your actual bills to figure out what you need to be making, and then you can decide how much more you want to be making. (Yup, I’ve got a rate calculator spreadsheet for that!)
Increasing Your Internal Hourly Rate
Now that we know how to calculate your ideal and actual internal hourly rate, you might be wondering what to do if they don’t match. (They probably won’t, and that’s normal, so don’t panic.)
When your actual internal hourly rate is far below your ideal, you have two levers to push on:
- Increasing your income earned
- Decreasing your time worked
You can push on both at the same time! In fact, that’s the fastest way to increase your internal hourly rate and overall revenue. I would also argue it’s the best protection against burnout.
You can make more money by billing more per project/client or booking more projects. My personal preference is to bill more per project/client, because adding clients always comes with a baseline increase in admin time. Plus you can only book so many clients before your workload is full and you can’t deliver quality service anymore. Learn more about how to raise your rates with existing clients.
Getting more efficient is a somewhat underrated way to improve your business, but it’s a challenge that I really enjoy. You can increase your internal hourly rate by bringing down your time worked while keeping your income earned the same. Check out my podcast episode and blog post about another way to give yourself a raise.
Keep Calm and Freelance On!
If seeing your numbers makes you nervous, try to remember: this is just data. It has nothing to do with how smart and skilled you are, or “how much you’re worth.”
I do suggest noting how your emotions might change as your actual internal hourly rate changes. I’d bet that the months you’re closer to your ideal feel more relaxed and/or fulfilling than the months you fall further short. Just note this until you’re ready to do something about it.
Remember: the data is there to support you in running your business according to your values. That ideal hourly rate is simply what you need to be making in order to stay in business and have the impact you want to make. Getting close to that is a good thing. You can do this!