How to Account for Health Insurance, Vacation Time and Other Benefits in your Hourly Rate

The topic of insurance and “benefits” as a full-time freelancer is one that both fascinates and perplexes old and new friends alike.

“I could never leave my salaried job – I need benefits!” they exclaim. 

“But what do you do about insurance?” they effusively inquire.

To which I usually reply, “Same thing Jeff Bezos does – I pay for it myself.”

I then pause for a moment to let my reply sink in.

Obviously, I am no Jeff Bezos. And clearly Bezos is so rich now that his own company has taken over the responsibility of providing healthcare coverage to not only himself and his family, but also his thousands of employees. 

But I’ve always wondered if Bezo’s friends and family asked him what he’d do about his insurance and benefits package when he resigned from the investment firm DE Shaw to open an online bookstore called Amazon back in 1994. Could you imagine how different the world would be today if Bezos was afraid to leave his salaried position because of his benefits package?

While this is clearly an exaggerated example, it illustrates my mindset when it comes to this topic. Trust me, I get it. Good health insurance is expensive – often too expensive for the people who need it the most. And benefits like paid time off and 401k matching are valuable.

But I’ve also never let those things hold me back from pursuing my dreams as a freelancer and small business owner. So the real question becomes: how do you account for self-care items like insurance and benefits when you’re a self-employed freelancer?

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The pricing formula I use to determine my rates

I’ve always been an advocate for treating freelancing like the business that it is.  And all good business owners know exactly how much money they need to make to be not only viable, but profitable. I personally use a basic formula to help me determine how much I should be charging to reach my personal and financial goals

My formula requires obtaining the following variables:

1. A desired net income
2. My business expenses
3. A rough tax estimate
4. Vacation time and number of hours I want to work 

Here’s an example of how I determine those numbers.

Step 1: Net Income

I always make sure that my annual net income makes sense for my level of expertise and profession. 

I could easily say that I want to make $2 million per year like Jeff Bezos, but since that’s probably not going to happen, I stick with a higher end, but still realistically attainable number.

For this example, let’s say my annual net income goal is $100,000.

Step 2: Business Expenses

I then take that net income goal and I add all of my fixed-rate expenses – like office space, internet, software, hardware and of course, health insurance. 

Let’s say that number comes out to about $20,000.

Step 3: Tax Estimate

Next, I roughly estimate my annual taxes. My taxes are obviously far too complicated to explain in a blog post, so to keep things simple, let’s just use a flat 28% tax rate (a safe bet). I then multiple my net income by the tax rate: $100,000 x 0.28 = $28,000.

Step 4: Vacation time and number of hours I want to work

I then think about how much paid vacation I want to take during the year. I usually like to take an average of four weeks off per year including holidays. I also like to take off most weekends, and I anticipate about six billable hours each day. That gives me about 233 days or 1,398 hours of billable time per year to reach my goal.

Step 5: The formula

Finally I plug all these numbers  into the following equation:

(Desired Net Income + Expenses + Taxes) / Annual Hours = Hourly Rate

In this example the math looks like this:

($100,000 + $20,000 + $28,000) / 1398 = $106 per hour

And that’s how I get a baseline of how much I should charge hourly  if I want to meet my net income goal and pay for my health insurance and give myself paid time off.

Why those numbers shouldn’t scare you

While it may seem unfair that our example above has to bring in close to $150,000 per year to net $100,000, let’s compare this to someone earning a $100,000 salary at a traditional job.

First, the traditional salaried employee usually works about eight hours per day and receives an average of only 10 vacation days per year in the U.S. 

Already, this salaried worker has to put in 20 more work days (around 251 days) and 610 more hours (around 2,008 annual hours) per year versus the freelancer in our example.

The salaried employee also, like the freelancer, has to pay for their medical insurance albeit usually at a reduced rate (the national average is $1,242 annually in premiums).

The average salaried employee also incurs about a 24% tax rate.

And unlike the freelancer, the salaried employee’s insurance and taxes are taken directly out of their paycheck. While it doesn’t feel quite as painful around tax time, it makes a dent throughout the year. 

Even though the salaried employee can ask for a raise, it’s more difficult and unlikely that they can control their income to adjust for expenses as easily as the freelancer can.

Let’s adjust our formula and plug in the numbers for the salaried employee.

(Salary – Insurance – Taxes) / Hours

($100,000 – $1,242 – $24,000) / 2008 = $37 per hour.

Benefits, as it turns out, aren’t everything.

The bottom line when it comes to benefits

While not everyone makes more money freelancing than they would in a traditional salaried position, according to Upwork’s 2019 Freelancing in America Survey, the majority of workers do.

According to the survey, 60% of people who left an employer to pursue freelancing earned more money than they did as a traditional employee, and 57% were able to do so in six months or less. 

For most freelancers, the real key to adjusting for self care items like medical insurance and time off is simply knowing your numbers and making sure that the math works for you.