Freelance pricing and tax glossary

The hourly rate a freelancer needs to charge so that, after business expenses, tax and unbillable hours, the remaining income meets their target. Distinct from a market rate, which describes what clients typically pay rather than what a particular business requires.

Hours that can be charged to a client. Distinct from working hours, which also include unpaid time spent on finding work, proposals, invoicing, admin and learning. Most freelancers bill between 50 and 70 percent of the hours they work.

The proportion of working hours that are billable, expressed as a percentage. Agencies commonly target 60 to 75 percent for delivery staff; independent freelancers, who absorb their own sales and administration, typically achieve 50 to 70 percent.

In the United States, a 15.3 percent tax on 92.35 percent of net self-employment profit, covering both the employee and employer halves of Social Security and Medicare. It is charged in addition to income tax, and half of it is deductible against income tax.

Tax payments made four times a year by self-employed people in the United States, because no employer withholds tax from their income. Generally due in mid-April, mid-June, mid-September and mid-January.

A provision that avoids an underpayment penalty on estimated taxes if you pay at least 100 percent of the previous year's total tax, or 110 percent where prior-year adjusted gross income exceeded $150,000, regardless of how much more you earn in the current year.

Business revenue minus allowable business expenses. The figure tax is calculated on, as distinct from gross revenue, which is everything invoiced before any costs are deducted.

A recurring monthly fee paid for ongoing work or availability. An access retainer buys a set number of hours or days; a deliverable retainer buys a defined monthly output. The second carries less risk for the freelancer because the boundary is built in.

The gradual expansion of a project beyond what was agreed and priced, typically through a series of small individually reasonable requests rather than one large change. Prevented by a written scope with quantities and a stated process for pricing additions.

An amount payable when a client cancels a project midway, usually covering completed work plus a percentage of the remaining fee in recognition of time that was reserved and other work turned away. Typically 25 to 50 percent of the unbilled remainder.

Setting a fee against the financial outcome the work produces rather than the hours it takes. Requires a measurable outcome, clear attribution to your work, and a client willing to discuss their numbers. Fees commonly fall between 5 and 15 percent of a credible first-year benefit.

A fee for a defined day of work, typically seven or eight hours, used for continuous engagements. Usually set above the simple multiple of an hourly rate, because a booked day removes the ability to take any other work and includes unpaid preparation.

A payment term meaning the invoice is due 30 days after issue. Net 60 and Net 90 are common in larger organisations and represent a real cash flow cost to a freelancer. Stating a specific calendar due date instead reduces late payment.

A charge applied to an overdue invoice, commonly 1 to 1.5 percent per month on the outstanding balance. Its practical function is usually to make the due date concrete rather than to be collected. Requires prior agreement in your terms to be enforceable.

A United States tax form by which a non-US individual certifies foreign status and claims any reduced withholding rate available under a tax treaty. Without it on file, a US client may be required to withhold tax from payments. Entities file a W-8BEN-E.

A VAT or GST mechanism under which the responsibility for accounting for the tax shifts from the supplier to the business customer, common on cross-border business-to-business services. The supplier invoices without adding tax and notes the reason.

A separate account holding the surplus from strong months, drawn on in lean ones, so personal spending does not track the shape of client payments. A target of two to three months of baseline expenses is common.

The fixed monthly costs that must be met regardless of income: housing, utilities, insurance, minimum debt payments and food. For variable income, these should fit inside your lowest realistic month rather than your average.