How to Calculate Your Self-Employed Salary
Being your own boss is a wonderful feeling, but it also comes with the responsibility of knowing how much to charge for your services. You may enjoy the freedom to take your career in whatever direction most interests you and to decide your own work schedule, dress code, and daily routine. But you also have to earn a salary that supports your lifestyle. If you’re struggling to figure out what your skills are worth, the following steps will help you set your price.
- Between 9.5 million and 44 million Americans are self-employed at least part-time.
- To figure out what your skills are worth, start by finding out what others in the same profession charge to get an idea of the average for your field.
- Next, investigate the market for your offerings in your local area and determine what sets you apart from your competition.
- It’s essential to tally up the cost of running your business. Overhead expenses such as healthcare, office supplies, and self-employment taxes need to be considered in deciding your salary.
- Don’t undervalue your time and expertise. Set a salary commensurate with your skillset.
A Portrait of the Self-Employed
Let’s first take a look at who in the U.S. is self-employed. The exact number is hard to pinpoint, but it falls somewhere between 9.5 million and 44 million. According to the Bureau of Labor Statistics (BLS), approximately 9.5 million Americans are unincorporated self-employed workers. The BLS figure, which is derived from household surveys, may under-count total self-employed Americans. One reason: Individuals who work a job for an employer in addition to having a self-employment gig may self-identify as working for an employer if given only one option.
According to the Internal Revenue Service (IRS), there were 19.6 million nonfarm sole proprietorships (unincorporated self-employment businesses) in tax year 2018, based on the number of taxpayers filing a Schedule C.
Additionally, the Gig Economy and Self-Employment Report, commissioned by Intuit QuickBooks with research by Gallup and conducted in 2019 (prior to any effects of the 2020 economic crisis on the economy), states that as many as 28% of workers—44 million in total—report being self-employed at some point during a given week. This figure is more likely to include workers who are self-employed part-time as well as employed by an employer.
These industrious people are in a wide range of professions—everything from construction to childcare and professional services to arts and entertainment. Whatever path your self-employment takes, these steps will help you decide how much to charge for your services.
1. Examine Your Peers and Competition
To begin with, check local sources, such as help-wanted ads, advertisements for services, and local business groups or your city’s chamber of commerce to get a feel for what other professionals in your field are charging. Trade magazines and national professional organizations are another way to get a feel for your profession’s going rate.
Intuit’s and Gallup’s Gig Economy and Self-Employment Report shows that the median income of workers who are primarily self-employed is $34,751, compared to a median income of $40,800 for those who work for an employer. The total compensation is effectively less because self-employed individuals must pay for their own benefits. However, your self-employment situation depends a lot on your particular profession.
2. Define Your Local Market
Once you know the average salary for your field, it’s time for step two: Investigate the market for your services in your particular location. Questions you need to answer include:
- Do you live in a large city, where going rates are generally higher, or in a rural location?
- How much competition do you have in your area?
- Do you offer anything unique or especially desirable that goes beyond your competition?
- Is your field in high demand?
- Are there local networking or business groups you can join to gain contacts and clients?
Once you’ve answered these questions, you’ll have a better idea of whom you’re competing with, what they’re doing, and how you can set yourself apart from the competition. You’ll also begin to grow your resource of contacts. The bigger your network, the more opportunities there are for your name and business to come up.
3. Tally Your Expenses: Taxes, Healthcare, and Business Expenses
Another common mistake of those new to self-employment is forgetting that freedom is not free. When you’re the boss, you need to provide your own healthcare, pay your own taxes, provide for your own vacation time, and keep the lights on, the car full of gas, and the office supply closet stocked. It’s also easy to let saving for retirement fall by the wayside, but with no one else to plan for your future, it’s crucial that you set aside regular retirement savings.
All of this overhead must be considered when deciding your salary. After all, you don’t just need to be compensated for your time, you also need to cover your bills.
An app that tracks cash flow and day-to-day business finances, like inDinero or QuickBooks, can make it easy to see how your money comes and goes.
4. Calculate Your Worth
One common mistake of people new to self-employment is undervaluing their time and expertise. Don’t fall into that trap—set your price for what you are worth. If you are new to the field, you’ll need to price yourself at the lower end of the average salary for your field, but if you already have an impressive portfolio or resume, price your work accordingly.
Pricing yourself too low can actually backfire—potential clients might assume that your low rates mean you lack skill or knowledge. Since you’ve already determined the average pay of others in your field, you should have a reliable salary range to base your prices on.
Once you have clients, keep track of hours spent on each project. Efficient use of time and impeccable record keeping are a must for the self-employed. Simplify the record-keeping process with an app that acts as your personal project manager. HoursTracker for iOS or My Work Clock for Android are good choices.
What Does It Mean To Be Self-Employed?
Being Self-employed means you are working for yourself. This generally means owning a small business classified as a sole proprietorship, but you can also receive money directly, as you will taxed the same regardless. Being self-employed offers many freedoms, but your tax bill will be higher and you may need to file more regularly.
How Do I Report Self-Employment Income?
If you are employed and have a side hustle, or work for yourself full-time, you report it all the same. Self-employed individuals report their income with a Schedule C, a separate form issued by the IRS. A summary of the forms required, as well as all necessary information, can be found on the IRS self-employment page. Many self-employed individuals find it cost-effective to simply hire a tax professional to handle filings for them.
Can You Claim Self-Employment on Taxes?
One good thing about self-employment income is that you are able to reduce your taxable self-employment income by half of the self-employment tax before applying the tax rate. It sounds complicated, but it is rather simple. When completing the IRS Schedule SE, you may find that you don’t pay tax on the entirety of your income. If you have a tax payment that equals $2,000, that means that you can reduce your taxable income by half of that, or $1,000. Remember this only applies to your tax payment and is not a blanket reduction on your taxable income.
The Bottom Line
When you make the jump to self-employment, you’ll need to consider several factors before deciding how much to charge potential customers. After taking into account your profession, your market, and your personal skills and experience, don’t forget to look at your costs of doing business. Once you have these numbers established, you’ll have a better picture of how much to charge and what you’ll need for a comfortable lifestyle.