How can I determine a good rate for freelancing?

I've currently got a startup and a full-time job. I'm looking to transition to part-time freelancing so I can focus more on my startup. However, I'm walking into this completely blind, and I need some help.

I think I can probably find some clients, but I'm at a total loss when it comes to figuring out what I should charge.

Is there a formula I can run on my current salary to figure out what an equivalent hourly rate would be? I tried dividing by 2000 (assuming 2000 hours / work year), and the rate seemed low to me. Am I missing something?

Note: Before someone misunderstands, I'm not expecting to match my current salary at half time. I want to figure out an equivalent rate so I can match half of my current salary.

Update: I also found this great guide which gives a lot of good (if scattered) advice.

Dividing salary by 2000 would be way too low. Consider for employees, nominal hours worked are 52 weeks per year x 40 hours per week = 2080. Those are the hours that a typical salaried employee gets paid for. But employees get paid for a lot of hours they don't actually work! Consider: vacation, paid statutory holidays, sick days, bench time, etc.

As a freelancer/contractor, you need to exclude such things as vacation, holidays, and marketing time. I use 1600 hours as my target for actual billable hours in any given year.

Even then, you can't just take your desired "salary" and divide by 1600 or whatever number you arrived at yourself (e.g. 800, if you're talking half time.) You also need to factor in down-time between gigs.

Then, hours aside, you will incur expenses as an independent that you wouldn't otherwise have as an employee: You'll need purchase your own insurance (various kinds, do your homework!), and you'll need the help of an accountant and perhaps a lawyer for your business, etc. etc.

So be very generous in setting your rate. Don't sell yourself short. Another drawback of setting your rate too low is: Your clients won't respect you. You need to charge clients enough that they expect they are getting an expert solving their problems.

UPDATE: I also recommend the Amazon short Consulting Contracts and Money by Gerald M. Weinberg

You need to charge what you can reasonably afford to while keeping the lights on in your apartment. I recommend this site for helping you get to the real number you should be charging for your freelance work. I used this when making the switch from cubicle to home office.

http://freelanceswitch.com/rates/

Few things to add:

• You don't say what type of freelancing you do. Find out what the general market rates are for the type of freelance services you will provide.
• Always think about solution vs. time and which is best. For example, it might take you 10 hours to do a project for a client. (Whatever type of services you provide.) So if you charge $125/hour then you're going to charge $1,250 for the project. But sometimes the project has significant more value to the client so you can charge based on the value of the solution and not just the number of hours. Not all the time but sometimes.
• Be willing to lose a new client to test what you can get. The tendency is to undercharge to get the business. You want someone to say "you're too expensive". Hopefully then you can negotiate and still get their business but at least you'll start to get an idea of the range of what you can make. You'll never know if you can make more until you try.
• Advice above is great. A general rule of thumb I've used (in addition to my first point about researching market rates) is you want to make 50% more than your salary as a freelancer/consultant.

All the best!
Chris

I have a blog entry that 'converts' a salary to a contract rate by taking out lunch hour, vacation, sick days, stats holidays, takes into account your own expenses. http://www.johnsoer.com/blog/?p=36 (Note this is for the Canadian market)

The issue I find and I struggle with this all the time. I believe an 80K a year job is equivalent to charging about 65 dollars per hour however clients will look at the 65 dollars an hour and say "I can hire two people for that" which is true but they never take into account that a contractor does not charge for vacation, sick days etc.

I found that when I switched to contract I tend to work a lot more hours than I did at my full time job, currently I average about 220 hours a month (Which are productive hours not counting lunch, breaks etc) which comes to a total of 2640 a year. The reason is once you start contract it is very very hard to say no to a contract in the back of your head you always worry about running out of work. You might find that switching to freelances you might actually have less time to work on your startup idea.

Unless you have a killer portfolio and references, you can only charge what the market will pay. The people hiring you won't care what you were making - they care what this job will cost. Check completed jobs on eLance (assuming it's a niche they cover) to see what people are paying. If you're US based, take that into account when comparing (there's a difference).

The point is, I would pay more attention to the market than your past income. Try to work up an average per job or per hour and see how much you would have to complete to be comfortable with your income. If $500 a job is a fair rate, but you can only reasonably finish 3-4 a month - that probably won't work.

Of course you can try charging what you NEED to make, but you might be pricing yourself out of the market (or making less than you could). Maybe you could make double what you're making now with freelance. I guess this is a long way of saying, start your formula with the market in mind and see if it works that way :)

Best of luck, freelance can be a great venture, especially in this economy when people are avoiding head-count increases.

You should look at the market rate. This will depend on, for example, where you are based, what you are doing, what sector you are in, how well known you are and what your skill and experience are.

Have a look at local jobs boards / ask around to see what other people are charging.

Contrary to most of the advice you'll receive, I do not recommend time-based billing.

Your training and skill level has a bearing on your ability to do the work.  However, this has no bearing on the amount you should charge except that if you can't do the work within the desired time-frame you'll not be able to charge anything.

The price to charge should be relative to the value the client tells you they will derive from you doing whatever you do.

Negotiating some arbitrary hourly rate reduces you to a commodity, and you are not orange juice!