How should I set my daily rate as a contractor?
As we hurtle towards another new year, people everywhere start thinking about pay rises, and contractors are no exception.
You might be an employee thinking about becoming a contractor in 2020 and working out what your daily rate should be for the first time. You might be a seasoned contractor, giving yourself a pay increase. Either way there are things you need to consider to ensure you set the correct rate for yourself.
There are a lot of online calculators out there that work out your daily rate by asking you for your salary and then telling you from that what your hourly and daily rate should be. This is problematic though since they don't take into account things such as insurance, business expenses, utilities, or any of the things that your employer would usually cover that you need to pay for yourself as a contractor. There are also sites that list averages by industry, but these often don't take location into account and a contractor in London will likely charge much more per day than a contractor in Manchester.
How to work out your daily rate
This can take a while so grab a cuppa, get comfortable, and open a spreadsheet. Now, make lists of:
- All of your household and family expenses including mortgage or rent, bills, groceries, vehicle costs, mobile bills, gym memberships, subscriptions, childcare costs basically, anything that gets paid for on a regular basis. If you split costs with your partner or spouse, work out your share.
- All of your business expenses including contractor insurance, professional memberships, cloud storage, service subscriptions, website costs anything that you need to pay for that an employer normally would.
The above sum is the bare minimum you have to be able to cover on a monthly basis so it's good to keep that amount in mind.
Next, think about what you would like to have left in your pocket every month after all that has gone out. Remember that you should be setting roughly a third of what you earn aside to cover tax, National Insurance, and any student loan repayments so factor that in and add it on.
Then, be realistic about how many days you would be working per month. Depending on each individual month, you're looking at around 21/22 working days per month. But you may well not be working all of these either through choice or because you may have time out between contracts. Divide what you'd like to be earning by the number of days and you have a good ballpark for your day rate. Of course, depending on your experience level, where you are in the country, the market rate for your industry and so on, you may want to drop it down or boost it up a bit, but at least it gives you an idea of where you should be aiming.
Ultimately though, there are two sides to setting your day rate: what you need to earn to pay your bills, and what you know you're worth.