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Most design firms and agencies cope with temporary increases in
their workload by bringing in outside designers on a subcontractor
basis. A freelancer with very specific skills is brought in to help
with a particular phase or aspect of a project and the freelancer
is usually paid a negotiated hourly rate (and reimbursed for any
necessary project materials). The rate that you receive will be a
gross amount—that is to say that no taxes will be withheld. As a
self-employed worker, you are responsible for all of your own taxes
and business expenses. For that reason, it's important to calculate
an hourly rate that is based on your own situation. The process is
not complicated—just follow these simple steps:
Start by adding up all of your annual business expenses. If
you've been freelancing for a couple of years, this is easy—just
look at Schedule C from the federal income tax return that you
filed last year. However, if you're new to freelancing, you'll need
to prepare a worksheet with estimated amounts. Do some research to
make the estimates as realistic as possible and be sure to include
a reasonable salary for yourself—one that honestly reflects your
skills and your level of experience. (As a reference, look at the
annual survey of design salaries published by AIGA.) A complete
list of your annual business expenses will look something like
This calculation includes all of your general business
expenses—it does not include the purchase of outside services or
materials that relate to just one project. If you buy printing,
photography, or special materials for a specific project, those
expenses would not be factored into your hourly rate. Instead, the
costs would be marked up, then billed to the client separately.
The next step involves estimating how many billable hours you
might be able to produce during the year. No matter how diligent
you are, you can't be billable every waking moment. Out of a
full-time work schedule, most designers range between 50 and 80
percent billable. Here's a format for estimating your potential for
Why is this example on the low end of the scale? In a large
firm, staff designers have the potential to produce lots of
billable hours because other employees are there to take care of
non-billable tasks such as marketing. As an entrepreneur, however,
you'll be doing everything yourself. New business development
activities may take up a significant portion of your time,
particularly when you are first starting out.
At this point in the process, you know how much money is needed
each year to keep your business afloat and you know how many hours
are available to produce that money. The next step is simply to
divide the total expenses by the total billable hours available.
This gives you a breakeven rate, meaning that you have to charge at
least that much per hour in order to keep the doors open.
However, you want your business to do more than just break even—you want it to produce a profit. To make sure that happens, you
must decide on a target profit margin and build that margin into
your billing rate. This is an important management decision for
you. The typical profit margin varies by design discipline, but it
is usually somewhere between 10 and 20 percent.
Now that you've calculated your personal billing rate, it would
be very helpful to compare it to the rates that other freelancers
use for similar work. Ask around within your community and check
for recent surveys. A junior production specialist may bill for as
little as $35 an hour while a creative director may bill for $75 or
more per hour, so it's important to find comparative information
that is a close match to your own skills. Most advertising agencies
and design firms use lots of different freelancers. This means that
they know what the typical rates are, although in conversations
with you they may be tempted to understate them a bit as a
negotiating strategy. If you are asking to be paid more than the
going rate, you will have to be able to explain why that is
You may want to adjust your own billing rate in response to the
industry comparisons that you have found, but you should never sell
your services at less than your breakeven rate. If you are a
freelancer with modest expenses but a high number of billable
hours, then you may have the luxury of adjusting your billing rate
upward. However, if you find that you need to adjust your rate
downward in order to be competitive, then you need to go back over
your calculations very carefully. As a businessperson, you must
find ways to cut costs and/or increase your billable hours. You
might also consider lowering your target profit margin, but you
should never eliminate it altogether.
Finally, you should keep in mind that calculating an hourly rate
is not a one-time process. You need to update your hourly rate
periodically because costs change, your skills change, and overall
client demand changes as well. Because of this, it's a good idea to
recalculate your standard rate once or twice each year to make sure
that it remains as current and competitive as possible.
Shel is a graphic designer who is active on the business side of professional practice. He has solid experience managing the operations of leading creative firms and guiding them through periods of accelerated growth and rapid change. He has served as director
of operations for MetaDesign San Francisco and as vice president of operations for Clement Mok. He provides management consulting services to a range of creative firms in both traditional and new media. Shel has served on the national board of the Association
of Professional Design Firms and as the president of AIGA San Francisco. He has written and lectured on many topics related to design management and teaches Professional Practice at the Academy of Art in San Francisco, the California College of Arts, and the
University of California.
How do you put a price on your creative services? Consider these strategies for getting paid what you’re worth.
Section: Tools and Resources -
When design firms sell work, there are several very different ways to structure the compensation. Take an in-depth look at six models.
Section: Tools and Resources -
compensation, freelancing issues, pro bono, finances, rates
Working for clients on a fixed-fee basis requires firms to use very logical processes to plan pricing. Learn four different methods to get potential rates for any project.
AIGA maintains its position against speculative work while recognizing that the decision on whether to take the risks of speculative work is up to individual designers.
Section: Why Design -
In this session of the “Financial Metrics” series, David C. Baker helped attendees understand what their utilization is, what’s contributing to it and how to fix it.
Section: Events and Competitions -
finances, rates, studio management
No business thought leader has advocated more for the
design profession than Dan Pink. His books have consistently encouraged those in the
business world to not only value and nurture their own innovative and
creative sides but to seek out and empower the right-brain individuals in their
companies. In this interview, Dan provides insights on issues unique to the in-house design community.
Section: Inspiration -
in-house issues, INitiative
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