How To Convert Your Salary To An Hourly Rate As You Start Your Consulting Business
As you start your business as an on-demand advisor or consultant, here’s how to convert your salary to an hourly rate.
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Whether you’re already a consultant or a former executive looking for new challenges, it’s a great time to start your new consulting business. I speak from decades of experience consulting on my own and starting my firm when I say that for people like us, there’s nothing more rewarding than running your own business.
On-Demand Consulting When You Have A Full-Time Job
Even if you have a full-time job, you can still start a part-time consulting business by working at nights and on weekends. It’s a great way to learn new skills, make contacts with potential employers and give your resume a boost — plus, add some extra money to your bank account. Just be sure to check with your employer to see what restrictions are in place regarding outside compensation.
Starting Your Consulting Business
It’s pretty simple to start your consulting business. Just order some business cards, and create a simple website on Squarespace or WordPress, and you’re pretty much ready to go.
You can use your Social Security number (SSN), but with the increased focus on freelance workers’ rights, I highly recommend incorporating your consulting business and applying for an IRS employer identification number (EIN). Talk to an attorney and an accountant to figure out which structure is best for you. The advice I’ve received is that incorporating helps to substantiate the claim that you are indeed an independent contractor — and this allows companies to be more confident in engaging your services. With increased focus and regulations on freelancer rights, be prepared for clients to ask about your incorporation status. Personally, my own consulting firm is incorporated as a limited liability company (LLC).
Some people choose to start their consulting business with their name. Others choose names that convey the services they offer. Others choose more abstract names. Regardless of how you choose your business name, be sure to have business cards to give out to potential clients.
How To Set Your Hourly Consulting Rate
It’s best for new consultants to start by setting their hourly consulting rate, which can be used to calculate a monthly retainer and as a guideline for project-based fees. Most fledgling consultants struggle with setting their consulting rates, but it doesn’t have to be difficult to calculate based on your current or most recent annual salary.
Imagine your most recent annual salary is $100,000. Begin by converting that figure to a basic hourly rate. Full-time employees typically work 2,000 hours per year after holidays, so divide 100,000 by 2,000 to get 50 — or $50 per hour as a starting point.
Why You Should Add A Buffer To Your Hourly Consulting Rate
However, on-demand consultants and advisors should also add in a buffer. That’s because consultants pay for their own healthcare and office expenses, along with not being eligible for paid sick time or vacation days. In addition, consultants rarely work 40 hours per week for clients, as they need to spend time on business development (BD) to get their next projects, and they have to spend time invoicing and collecting from clients.
Most consultants I know add a buffer of 30% to 50% to their hourly rate to account for all these expenses. Those same consultants will add a much smaller buffer when using a marketplace or other service that allows them to focus their work hours on billable project hours — versus BD and sales or time spent billing clients.
If you build in a 30% buffer to your rate of $50 per hour, you can charge $65 per hour. If you add a 50% buffer, your hourly rate becomes $75 per hour. More experienced on-demand consultants and advisors with highly specialized skills, pedigreed backgrounds and proven track records of delivering results to clients usually increase their rates beyond that. I’ve worked with on-demand expert advisors who charge as much as $800 per hour, but $65-$75 is a terrific place for a brand-new consultant in search of their first client to start.
After arriving at an hourly rate, be sure to do a gut check. Think about the potential impact your work may have on the client’s business, how urgently the project need is, and how specialized your specific experience and knowledge are. These are just a few reasons you may want to consider adjusting your hourly rate. Don’t sell yourself short!
Now that you’ve calculated your hourly rate for on-demand consulting and advisory services, you’re ready to embark on your new venture. You will be thrilled when you get that first check — but more importantly, congratulations on setting yourself up for an independent and rewarding career path.
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Category: Freelancer Tips Industry Trends
Updated: May 18, 2020
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.