As a freelancer I scored a project with a large company to work temporarily as a freelance consultant. I was to do the same job as the rest of the employees who worked with me but I would receive twice as much as their pay. When I realised that I was being paid two times what my colleagues were being paid, I couldn’t help but to feel like a greedy opportunist who was taking advantage of the company. I was wrong to feel this and I was actually being paid what I should have, if not more, and this article is about why this is true.

I was not being paid the “hidden” costs which the employees were being paid but never saw them because they were filtered out before their wage got to them. It was only fair for me to receive my hidden costs too, but without the filtering.

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So when I finished working as a freelance consultant for this company, I started incorporating the hidden costs into my rate. As you will see by the end of this post, it is only fair to do so.

Many freelancers will be in the attitude of thinking this (for example):

I want to make £30,000 a year. Therefore if I work 5 days a week and 8 hours a day, my hourly rate is around about £16 an hour.

WRONG!

You will see how it ought to be at least twice this amount; otherwise you will not net £30,000.

The Hidden Costs

Recruiting

There are two choices a company faces when recruiting. Advertise in local papers, job centres and other areas for the job vacancy, then filter through the paper work sent in for that job and then interview all the applicants to eventually decide on one person who will get that job. Some advertising companies even ask for a significant cut of the wage for finding the right employee. On the other hand the company can hire a freelancer whose portfolio is easy to view online and will come to do the job quickly and efficiently.

If a company hires you, they are saving money on advertising, hours spent going through CVs, and hours wasted spending a long day or two of interviewing all the applicants. All these hours doing these things could have been spent doing something more productive and more profitable for the company. On average a quarter of employees leave their jobs within the first six months, so the likelihood of repeating the process is high.

The company could be outsourcing to you, in which case, they are again saving money on recruiting. You ought to bare this in mind when quoting a price for their project, because at the end of the day, if you have saved them X amount of money and charge half of X more, they will still be saving money.

Income Tax and National Insurance contributions

An employer is required by law to deduct from the employee’s salary, and pay contributions to national insurance. If you were to be employed by the company, this would be a hidden cost which they would have to pay.

The employer is also required by law to make sure that income tax is paid, so the wage which an employee receives has already seen income tax deducted from it.

As a freelancer you are a sole trader or an employee of your own limited company. You will be required to pay income tax yourself. So when quoting your rate, keep in mind that you will have to add on income tax and all other taxes you will have to pay yourself.

Insurance

Liability insurance protects an employee if they are injured at work. An employer is required by law to have liability insurance and usually must be insured up to at least £5million. Numerous freelancers will work from home and therefore will not have to hassle their employer with liability insurance. True, it may be a cost which they will pay regardless of whether you work at their premises or not but a small employer will be at an advantage.

Sick leave

As an employee you have got rights and this means that if you become ill as an employee, you will still be paid. As a freelancer, however, you will be paid for the work which you do, healthy or unhealthy.

If an employee becomes pregnant they will take maternity leave and an employer must continue to pay them. Guys get paternity leave when their partners have a baby and an employer must pay them for the time they take off. An employee must be even paid when taking a holiday.

Yet a freelancer does not get maternity/paternity leave, sick leave or a paid vacation. This means you will have to save up for those rainy days, which means increasing your rate. There is no point earning the same as an employee who has all these benefits, so you must make those benefits for yourself or risk surviving on welfare if you become ill.

Office space

You may think that because you are working in your garage you are not paying any office expenses.

Wrong again

The gas and electricity which provides heating and power for your appliances are costs. Your chair, computer, desk, filing cabinet, printer and ink are all expenses. The more you use any of these things the likelihood of having to replace them increases.

As an employee your computer, desk, chair, electricity, heating, coffee, milk and the actual space you work in are all paid for by your employer. If you are your own boss, you are paying for these things and so ought to include this in your rate.

Managing costs

If you are a freelancer who works from home, your work ethic does not have to be regulated by a manager. You are given a project, you do that project by the deadline and you’re done. As an employee you will have to be trained by your employer and given tons of paperwork of company policies etc. There will have to be constant meetings regulating the time of the employee taking up valuable time.

As a freelancer you save the extra costs of being managed. You ought to consider this when evaluating your rate because you will be saving the company its most costly expense – management.

Pensions

Large companies are required by law to make pension contributions for their employees. Freelancers will not have pension schemes from their employers and therefore you must care for your own pension scheme.

Other benefits

Employees get many other benefits which I am sure you have heard of. Yearly bonuses and company cars are just some of the many lovely extras which employees enjoy for working hard. We work hard as freelancers and we will not get anything. Our rate, therefore, ought to accommodate this.

Important Final Word

An employer will only employ you if you will bring value to the company. Despite all of the expenses listed above, an employer will still benefit from the employing workers because the value they bring into the company is three or four times what they are being paid at the end.

This is the greatest argument for increasing your rate and if you continue charging like you are from a developing world, you need a reality check. Increase your rate or soon you will regret it.

Places To Find Work For All Types of Freelancers

oDesk – With almost any set of skills you have, you should be able to find freelance work here. They have a wide variety of categories. This is a heavily posted website.

Elance – They have over 30,000 jobs posted. They also cover many different categories, almost any type of freelancer can find work here.

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