The Freelancing Equivalent of a Six Figure Salary

I was unemployed for a short time earlier this year and I was considering freelancing, independent consulting as well as a salaried position. Given my analytical nature, I wanted to figure out how much I would need to charge in order to replace my salary. I have always been a salaried employee, so I needed to include the costs of taxes and health insurance as well. I wanted to write a blog post about my findings, but had forgotten until I read a recent post by Skellie over at Anywired regarding a Practical Guide to Earning Six Figures. Skellie has a perfectly reasonable post about this, but leaves out normal office costs, and the taxes and insurance that a corporation pays. This is probably because the target audience is probably already freelancing. So, what does it mean to become a freelancer if you are currently a corporate employee?

Basic Work Schedule

Anyone I have talked to in the freelancing or independent consulting crowd has said you should assume you will not be working about 2 months (or 8 weeks) out of the year. As an employee you typically get about one month of paid time off including vacation and sick time. The minimum of an additional month is needed for gaps between jobs. So, that leaves you with 44 weeks of work. In order to make $100,000 of revenue, assuming 40 hours of work per week, you need to bill $56.82 per hour.

That is the minimum you need to bill. You cannot assume you will work more than 40 hours as some time is required for general bookkeeping, marketing and finding your next client. Plus, if you work for a client for more than 40 hours, think of that income as a bonus. There are also a number of expenses that you would not normally incur like office supplies, a new laptop, a desk and other basic office needs. For our purposes, let us assume it will cost $5000 for your new office. Now, your yearly income needs to be $105,000, or $59.66 per hour.

Replacing Your Employer

This is the part that most freelancers do not talk about, replacing the costs that your normal employer pays. So, you have the taxes that the corporation would pay. I will not get into the benefits of a C-Corp, S-Corp or LLC as that is best left to a financial professional. If you are considering freelancing, I highly recommend talking to a financial professional because there are benefits to “incorporating” yourself. First, what are the assumptions that the corporation normally pays? There are the state and federal taxes and medicare costs. There is also health insurance and most likely a 401K plan. Unless you can get health insurance and a 401K from your partner, you really should have both even as a freelancer. Normally, the taxes taken from your gross pay are around 20%. For the 401K (or equivalent IRA), you should be taking about 5% out of your gross income as well.

Health Insurance is the big cost that most people have no clue about. In Pennsylvania, you can find “small group” insurance plans for a family that cost about $1200 per month. If you are an individual, the costs can drop to $250 per month. For our purposes, we are assuming that you need the family insurance plan for a little more than $1200 per month. For an entire year, the insurance would cost you almost $15,000. This increases the gross income to $120,000. Given that there are also unplanned expenses for any endeavor, we want to add the taxes and 401K savings to the gross income. This allows us to plan for these expenses as well as any tax shortfalls you may have. For the additional 25%, the yearly income increases to $145,000 or $82.39 per hour.

So, if you want your (almost) net income to be six figures, you would need to bill a minimum of $82.39 per hour. If you want to have a gross income of six figures you are billing a minimum of $59.66 per hour. Your net income would also drop to approximately $63,750. There are other expenses as well that could appear. You may need training on new technology, or at least some level of education. This is typical a few thousand dollars per year, depending on what you need training in. There are also legal and accounting fees that you will be paying in order to ensure that you are somewhat shielded from liability and you are submitting your taxes appropriately. If you “only” bill $100,000 of income, your net income can drop below $50,000 fairly easily.

Obviously, there are ways to minimize some of these costs. Getting in touch with your local small business association, can provide you with cheaper services from local businesses. Sometimes the SBA can also get you a group rate for the health insurance as well. There are also other personal issues like not working at an office with a team of people, but that is not a financial concern and Skellie could give you better information anyway.

So, do you want to be a freelancer?

11 thoughts on “The Freelancing Equivalent of a Six Figure Salary

  1. Yep, that is one of the reasons I am not freelancing right now. Health insurance is particularly ridiculous.


  2. Great article. too often I think we think “wow, I am billed at XXX rate, what if I took that all home” without considering all the overhead that is involved. I’ve always preferred to leave the new biz development (and billing) to someone else, to allow me to focus on my primary skill set. Any extra time you’re not doing billable work needs to be accounted for in those rates..

    (as well, as a Canadian living in the U.S., that whole health insurance thing is still a total mystery to me…)


  3. @Andrea
    Biz development is probably the main reason I am not independent or freelancing right now. I never really had the stomach for the “sales” side of the business.


  4. You are right on with all your concerns, but I found a way around some of that. I outsource all my back-office operations to a company called MBO Partners. They handle invoicing my clients for me, and collections when necessary (oh, how we wish it wasn’t necessary!). They also act as a W-2 employer of record, which means a few things: easier tax management, access to group healthcare benefits and retirement savings plans. I still get to run my own business as I see fit. Sorry to the one poster who doesn’t like the marketing end of things…you do still have to get your own clients, but they have master service agreements with a lot of big-name companies, so it could be easier to get your foot in the door there.


  5. @Angela,
    Well, the reason some people go into freelancing is for the money. Typically, you can make more money as a freelancer when compared to a salaried employee. I like the idea behind a company like MBO Partners, but it does tend to cost money that people do not want to pay. Probably the biggest part of this is the group benefits though. In the US that can be a huge savings.


  6. I think when you’re evaluating any service like that (MBO or others) you need to look at the total financial and business landscape for what it does for you.

    Yes there is a fee, but there are also savings on taxes, benefits, business insurance, and other line items . . . not to mention not spending hours that could be productive doing paperwork to invoice and collect from your clients. So find out what the actual cost is . . . for your situation.

    I’m a big time proponent of oursourcing busywork to others. Have you read the Four Hour Work Week?


  7. @Teddy

    Yes, your time should have a dollar value. I have always told people that if you bill $100 per hour, then the administrative work should cost your billable amount. If you can outsource it for cheaper than your rate, maybe it is worth it.

    Funny you mention Four Hour Work Week, I am about halfway through it right now.


  8. Exactly — it’s not worth it for me to be doing accounting and paperwork for $125 an hour. Outsource!!!

    I’m also always researching ways to run a more efficient business. It’s worth a little bit of internet research time, and of course there is no substitute for picking up the phone and talking with a company to see if they can save me money and time.

    Calling cuts through the Marketing crud very quickly, and also keeps me from being added to email lists since all they have is my number.


  9. @Teddy – Exactly why I’m thrilled to have found them. The amount of time I save not having to bill my clients allows me to do more work FOR my clients, so I make more money. @admin – Teddy is right, I actually save more money and am able to make more money by working with MBO when you consider the savings I get on insurance, the additional time I can spend doing billable client work, and the fact that I don’t have to carry general business liability insurance at all, it’s free through them.


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