The hourly rate is the amount that an employer is entitled to for one hour of working time. The amount of the hourly rate can have an influence on the quality of work. The hourly rate is set by law as a minimum by the minimum wage. The extent to which it exceeds this can be negotiated at any time. You can find out what you need to know about the hourly rate in this article.
The contents of the hourly rate
The hourly rate plays a decisive role in the livelihood of employees. If the hourly rate is too low, the livelihood is not secured. Employees usually negotiate the hourly rate with employers on the basis that they can make a living from it. In most cases, they also take into account the fact that they want to be able to afford something or build up reserves.
Freelancers, independent contractors and service providers generally do not have a fixed hourly rate. They have to recalculate their prices for each project. If the calculation is too low, projects and orders may not be completed. The turnover must therefore be high enough to cover projects and orders and to make a living. A correspondingly high hourly rate is therefore also very important in this case.
It should also be noted that turnover is not profit. This means that services cannot be offered purely on the basis of hourly rates. At the end of the day, there must be something left over to cover living expenses and business costs.
The following aspects should therefore always be considered in the hourly rate:
- Fixed operating costs that are incurred regularly and always remain more or less unchanged. These include, for example, personnel costs, rent and the cost of water and electricity.
- Variable operating costs that are not incurred regularly, but frequently. They usually fluctuate greatly in amount and depend on daily operations. These include, for example, the cost of raw materials, transportation costs, but also marketing costs that can be allocated to specific projects.
- The productive working time, which refers to the number of hours worked in a year. This is also referred to as the annual working time.
- The taxes that apply to most work. Which taxes are incurred also depends on the legal form of the company.
There are other factors that can influence the hourly rate, but these are the most important.
The hourly rate calculation
To calculate the hourly rate, the annual working hours must be used as a basis. The annual working hours are the hours worked in a year. The days off, such as weekends and public holidays, are therefore subtracted from the 365 days in the year and the result is multiplied by the daily hours.
Let’s assume a service provider works 220 days a year. Weekends and public holidays have already been deducted. Any absences due to illness are also already taken into account here.
The service provider assumes that he will have monthly operating costs of EUR 1,000.00. He estimates the cost of living at 800.00 euros. To cover these costs, he must therefore earn at least 1,800.00 euros per month. Calculated over 12 months of the year, this amounts to 21,600.00 euros. The service provider must therefore earn 21,600.00 euros on 220 working days.
That is 98.18 euros per day. For an 8-hour working day, his hourly rate would be 12.27 euros. However, this does not include the unproductive hours in which he earns nothing. These are the working hours spent on bookkeeping or other internal tasks.
The service provider calculates that around a third of his working time will be spent on these internal tasks. The new calculation would therefore be to first multiply the 220 days by the 8 hours and then divide by 3.
Rounded up, this results in 587 productive working hours per year. Divided by the 12 months – also rounded up – that is 49 productive working hours per month.
The 1,800.00 euros per month to secure the company and livelihood must therefore be earned in 49 hours. This results in an hourly rate of 36.74 euros.
This calculation clearly shows how important it is to factor in all costs in advance. You should also always bear in mind that unexpected costs may arise and that there are always expensive and less expensive months.
Conclusion
The hourly rate is important to be able to run a business. However, it is just as important to be able to cover the cost of living. A calculation that takes into account all costs as far as possible is therefore sensible.
