There are many different ways you can slice, dice and present your freelance rates to potential clients. But there’s always the lingering question of whether you're charging the right amount.

You want to offer clients the value they deserve but you also want to help your business grow and charge rates that let you fully enjoy doing it. Here’s a 5-step process to do it perfectly.

Step 1: Identify your target annual income

This is the easy part: How much money do you want to make?

Maybe you just want to do better than what you earned at your desk job. But it’s more likely you have some cost-of-living expenses to think about. You can get detailed and calculate your rent, utilities, bills, groceries, emergency money, etc. Add on how much money you’d like to save in a given year. Then calculate your target annual income.

Step 2: Know the costs of doing business

It’s important to remember that your annual earnings and income are 2 different things. There are certain costs to doing business that you need to consider first. Small things like your web hosting and task management tools might not seem too significant, but it can add up to a lot.

Some costs to doing business you should consider are computer care/replacement, office space (if you don’t work from home), Internet, invoicing tools, marketing and task management tools, paid advertising expenses (if applicable), PayPal or other money transfer fees and contingencies (e.g. unpaid invoices).

You should also consider self-employment taxes and the cost of having your own health insurance. Add everything together and you’re probably looking at tens of thousands of dollars in business expenses. Add these onto your target annual income.

Step 3: Calculate your time investment

Next, you need to figure out how much time you can reasonably spend in front of your computer working. There are 365 days in a year, and how many of them you spend working is up to you. You should consider:

• Vacation time and holidays
  
• Sick days
  
• Too tired to work days (they happen)
  
• Whether you’ll work weekends
  

Once you have an idea of how many days of the year you’ll spend working, decide how many hours each day you’ll work. For example:

230 days of work at 8 hours per day = 1840 hours per year of work.

Now, you won’t be paid for every single hour you spend in front of the computer. Come up with an estimate for business management tasks (checking email, invoicing, etc.) and prospecting. Subtract these hours from your total to get your real annual time investment.

Step 4: Determine your hourly rate

Now you have all the information you need to calculate your hourly rate. Take your target annual income + business expenses and divide that by your annual billable hours. For example:

($80,000+$9,488) annual earnings / 1400 billable hours = $63.92.

In this scenario, at a minimum you’ll want to charge clients $63.92/hour. If you can find opportunities to charge more, that’s extra earnings on top of your target goal.

Step 5: Don’t forget about value

The first part of this guide showed you how to calculate your minimum hourly rate. That’s good information to know, as you’ll probably spend some time doing hourly work for your clients. But is that how you should price all your work? Definitely not!

Using an hourly rate puts a big limitation on your earning potential: time. There’s only so many hours in the year to earn money. Freelancers work on average less than 40 hours per week, but 79% say they earn more money freelancing within a year of leaving their traditional jobs.

So how do they do it?

Through fixed price jobs. Telling clients how much a project will cost, not how much time it will take you, is where your real earning potential is. Look at these two scenarios for a freelance designer:

• It will take you 2 hours to design a logo at $150/hour
  
• You will design a logo for $300
  

The first scenario leaves the client asking: Is it worth it to pay them that much per hour? Maybe, maybe not.

In the second scenario, they ask: Is a custom logo design worth $300? Yes.

Suddenly people are paying for the value of your service, not the perceived value of your time. When you send a quote to a new client, take hours out of the scenario. Tell them how much it will cost. Then you can start charging more money for the same amount of work.

If you follow the first 4 steps of this guide to determine your hourly rate, you’ll have a great starting point. Now you know how much you should charge at a minimum to meet your earning goals.

But don’t let your hourly rate stop you from growing your business even more. Start offering fixed-priced options to earn above and beyond, or earn the same salary with less time investment.