Determine your hourly rate

Here's how to determine your hourly rate: 3 principles

As an entrepreneur, you determine your own hourly rate. What a good hourly rate i for you, depends on a few things. Take into account the following:

• The income you need

  Determine the minimum amount you need per month. Moneu to live on and to pay your bills. Your hourly rate, after deduction of business costs and taxes, must be sufficient to end up with at least this amount.

• The hourly rates of competitors

  Check what other entrepreneurs charge for the same work. Is your rate much higher or lower? Then make sure you can properly explain why.

• The law of supply and demand

  Is your service in great demand, and are there few competitors who can do what you can? Then you can ask for a higher hourly rate. Do you do the same as many others? Then sometimes a lower rate makes more sense.

Step 1: the business costs

Determine your business costs. Such as administration costs, inventory, selling and representation, car, interest, depreciation, and insurance. 

Step 2: how much do you want to end up with?

Determine the amount you need per month for your private expenses. Retirement savings and disability insurance costs are also private expenses. Also take into account money you have set aside, for when something breaks down at home or to pay for your holiday. You need the total of these amounts as your net income.

You need more than this amount from your business, because you also have to pay income tax and the income-related health insurance contribution.

Income tax and health insurance contribution

You pay income tax on profits from your sole proprietorship or your profit share as a partner in a VOF (general partnership). You may qualify for entrepreneur allowance (ondernemersaftrek) or SME profit exemption (MKB-winstvrijstelling). As a result, you pay a less tax. You pay income tax once a year. Set aside enough money for this.

You can calculate the amounts to be paid for income tax and health insurance contributions using the ‘Calculation tool for calculating hourly rates’.

Step 3: required turnover

The turnover you need should be enough for:

1. the business costs (step 1);
2. the desired income, taxes and insurance contributions (step 2).

Step 4: billable hours

How many hours do you charge your customers? If you assume a 5-day working week of 8 hours a day, and thirty days for holidays and days off, you will have 230 days in the year to work. That is 1,840 hours.

But you do not send an invoice for all those hours. You also spend time on acquisition, networking, administration, and brainstorming new ideas. As a starting entrepreneur, you should be satisfied if you can charge 50 to 60% of those 1,840 hours.

Include additional costs in your hourly rate

In addition to your hours, you incur expenses for your client, for example, travel expenses. You can charge these to your client. Agree on this in advance and discuss whether these costs are included in your hourly rate or will appear separately on your invoice. Also include in your general terms and conditions or contract which costs are and which are not included in your rate. This prevents problems later.

Turnover tax

You charge 21% or 9% VAT on your hourly rate and additional costs. The rate depends on the nature of your service. Or you use a VAT exemption such as the small businesses scheme (KOR) or a reverse charge mechanism.

Tips

• Work with a variable rate. You charge a higher rate for an urgent order. With a longer, permanent assignment, you give a discount, or include something extra in the price.
• Do you want to adjust your hourly rate according to the price development in the market? Use a CBS price index, for example the consumer price index (CPI). The price index indicates the price development compared to a previous year.
• You should review your hourly rate at least once a year and more often if there are major changes. For example, a sharp rise in energy costs and raw materials. Perhaps you must increase your hourly rate.
• Negotiate effectively with your clients.
• Get help from a bookkeeper or accountant via NOAB (in Dutch) or NBA (in Dutch) if you find it difficult to set your rate.