The difference between rates and wages is not always clear to newly self-employed
people and their wage-earning clients.

Both look similar on the surface; both are expressed in dollars and cents per hour.
But they each represent something very different.

Wages are the payment a worker receives for his labor.

Rates are the payment a business receives for performing a serivce to a client. In
addition to the labor used in performing that service, rates must cover the
business's overhead.

Because of that, rates have to be higher than hourly wages earned by employees for
comparable work.

Most newly self-employed workers are former employees. They are accustomed to
receiving pay based on wages. Because they don't understand the difference
between rates and wages, when they start out, they tend to set their rates too low.

To survive, your rates must be high enough to pay the bills and enable you to earn a
living.

Some of the differences between a self-employed person's rates and an
employee's wages are explained below.

WAGES

• If you are a wage earner, you are due an hourly wage just by being present and
willing to work at a set time, for the period of time demanded by your
employer.

Your wage is the payment for your labor.

• The employer supplies the necessary equipment and supplies for you to do the
work. And, the employer supplies your workplace.

• You enjoy all of the legal and social protections due to employees such as
Unemployment Insurance, and employer paid Worker's Compensation Insurance.

• Most full-time employees enjoy fringe benefits. These range from paid vacation
and sick days, subsidized health insurance, retirement benefits, etc. to stock
options and more to higher ranking employees at larger companies.

RATES

• As a self-employed service provider, you receive income based on your billable
hours, that is, time spent on performing services for your clients.

• You furnishes your own supplies. Unless the service is one that is performed off-
site, you supply your own workspace.

• You have to equip yourself to be in business and provide your services: You must
procure and equip your workplace, invest in skill and product development, market
your services, purchase business insurance, and handle billing, recordkeeping and
collections.

• As a business owner you take on a great deal of risk. It is reasonable, and
expected, that your rates should allow for a reasonable profit over and above your
expenses and salary.

The above is true for any business. Below are additional costs you pay because you
are self-employed.

• Unlike most of your employed counterparts, there is no employer subsidy for your
health insurance. And, as an individual, your costs will be higher than they would be
as part of a larger organization.

• Aside from Social Security, you are totally responsible for your own retirement
nest egg.

• You will pay both the employee's and the employer's share of the FICA tax burden
(15.3%); double the burden that falls upon your employee counterparts. The IRS
allows limited deductions for this tax, but your net share is still far higher than for
your employed counterparts.

But you can only bill for services rendered.

The upshot is that as a self-employed service provider you must cover many
expenses that employees do not. Therefore you should have no qualms about
charging an adequate rate to cover your expenses and make a living.

About the Author

Ellen Zucker has been self-employed for over ten years.

Her site, http://www.selfemployment101.com, has articles and resources to help the creative sole-proprietor earn a living and create a life.