Setting Your Hourly Rate

This is a subject that’s sure to come up when you started your business, and it’s not one-size-fits-all. Nothing really is, after all, is it? For a service business, setting the right rate is vital, even if it isn’t always easy.

There’s a trick to pricing your services, and that is, it needs to be a price you’re a) happy with, b) that you can earn a living with, and c) one that your customers will pay. If you’re not happy with it, you’ll begrudge your customers the time you give them. If you can’t earn a living with it, what use is it? You might as well give away your services. And if your clients won’t pay it, you’re right back to not being able to earn a living.

Rates will vary based on geographical region, services, ego, experience, qualifications, your clients/customers, and a host of other factors. You may have been told to find out what others charge for the same service. This may work, and it may not. Many of us don’t give out our rates when someone we don’t know calls – you may have also been told not to do that yourself, to talk to the client about what they need before you start discussing rates so you don’t scare them off right away.

A bit of a Catch-22 there.

Also, you really can’t base your rates on what someone else charges. Some time ago, after I’d moved to a new area, I met someone who was doing the same work I was. We had lunch and talked about our rates. Hers were twenty an hour less than mine, and she told me I’d have to reduce my rates in order to get any work in this area. I thanked her for the advice and left my rates right where they were. I wouldn’t have been happy with a lower rate, and I know the value of my work.

Since then, many others have said my rates are just fine, among them CPA’s and clients.

One thing to keep in mind is that there will always be someone cheaper than you. But is this your competition? Only you can decide that. There will also be people charging more. What matters is what you need to earn for your business to be successful.

You may look at salary guides, but that doesn’t tell you what rate to charge. What it does tell you is what the going rate is for that position, if you were an employee. You’re not. You can’t build a business on employee wages. You have to pay your own taxes, provide your own equipment and office space, and you have to provide your own benefits. Of course, there are advantages to businesses to go with an independent contractor instead, which you may need to point out to them. The clients don’t always come to us pre-educated.

A good way to get a starting point for your rate is to think about what you need your annual income to be, net of taxes and expenses. Then add taxes and expenses. This is the part a lot of new business owners neglect to do. That’s the minimum you need to make, right?

Look at how many billable hours you can expect in a week. If you want to work a 40 hour week, you won’t have 40 billable hours. This is a business now, and someone has to do all the work that goes into running a business too.

So how much do you need to make an hour?

Look at your qualifications and experience. Do you think you’re worth that hourly rate? If not, you need to work on your ego (or, to be politically correct, self-esteem), or find out how to be worth it. If you’re think you should make more, charge more. Don’t worry about losing clients over it – the price shoppers will always be less concerned about service and more concerned about financial cost. They’ll spend so much time searching for the cheapest option that their businesses will flounder. And do you want to spend time on a business like that? (There is also truth to the rumor that you get what you pay for.)

Setting your hourly rate is a lot less about what other people are charging than it is about you getting what you need and want to be successful. If you’re good and can give clients the service they crave, you’ll do fine, no matter what your rate is.

1099 Season

It’s that time of year again, when questions about 1099’s fly through the air like sparks before an electrical storm. Who sends them? Who receives them? Why? When? How? Here’s a few basics, just to get started with, dealing ONLY with the 1099-MISC:

1099’s are issued by your business to anyone who provides services to you for $600 or more during a calendar year. Unless the provider of services is incorporated. Then you can skip the 1099.

How do you know if they’re incorporated? Prior to paying anyone for services, you should hand them a W-9, or mail it, or email it. The provider of services completes the W-9, and on it they can indicate if they’re a corporation and therefore not subject to receiving a 1099. The W-9 also gives you the all-important tax ID number, without which you cannot file a 1099. This is why we ask for a completed W-9 prior to payment, and, hopefully, prior to receiving services, to avoid the sort of skirmishes wherein one party asks for the information in order to comply with the IRS regulations and the second party refuses to provide it, and they’ve already received their payment. (See below for what to do in that case.)

There are exceptions, of course, this being a federal tax law sort of thing. Lawyers are to receive a 1099 if you pay them anything at all. You can often find their tax ID on their letterhead, in which case, no need for a W-9.

What if materials are included in what you paid to the service provider? You can break those out, by completing the 1099 for only what the service was. However, you’re not required to – if you have all costs posted to the same account in your accounting software and aren’t sure which are materials and which are services, send a 1099 for the entire amount. It’s the provider’s responsibility to deal with that on their own tax return, and it’s rather easily done.

Cash or accrual? CASH. You 1099 someone for the amount you physically paid them during the year. If they billed you another 100 grand but at year end it’s still on your books as a payable, it doesn’t count. That’ll be for next year.

Rents? If you’re paying rents, you’re also required to include rents paid on a 1099. There’s a separate block for rent paid.

When: 1099’s are due out by January 31^st, so the sooner the better. The filing for the feds comes later, but you must have the 1099’s out to the recipients by January 31^st.

How: There are so many options for how that I’m not sure we can cover them all at once. You can print them from your accounting software. You can order free forms from the IRS, and print them on those, though if you haven’t ordered your free forms by now, you won’t have time. You can buy forms at the office supply store. You can file online with various providers who will mail the forms for you and efile with the feds. This is my favorite, especially if a company only has 1 or 2 1099’s. I use filetaxes.com, but there are other options.

Red forms or not? IRS regs require that the 1099 and the 1096, which is the summary that goes to the IRS with their copies, be printed on their red forms. This is why the forms purchased at the office supply store come with red copies. However, I know people who’ve been printing them on plain paper with black ink straight out of their software for years, with no problems and no complaints from the IRS. Yet another reason why online filing is so great – there’s no need to worry about it.

Why? It’s the IRS. You want I should have an answer for what they do? But the short version is, the IRS wants to be able to check to see if someone’s reported all their income, and one way they do that is by checking 1099’s against the person’s tax return. So in completing 1099’s, you’re helping the government collect on taxes! That should give you a warm fuzzy feeling about doing it. There IS a penalty for not doing them by the way, should they happen to find out you didn’t do it.

Another warning on 1099’s: This year I’ve seen an increase in the number of business owners who refer to service providers as “1099 employees.” There is no such thing. You either have employees, or you have subcontractors. Do not confuse the two. Just saying someone’s a subcontractor so you don’t have to pay payroll taxes doesn’t work either. There are guidelines to follow, and if the IRS finds out you’ve misclassified an employee as a subcontractor, the penalties will be steep – not to mention the back payroll taxes. Not to mention your state – if they catch wind of it, back payroll taxes and penalties will mount up quickly. All it takes is one dissatisfied “1099 employee” to bring up the issue, so please don’t do it.

There’s so much more to 1099’s than I can cover here, so if you have questions about 1099’s, ask one of us who knows. We’re awash in 1099’s and W-2’s right now, and we’re not unfamiliar with the process!

New Mileage Rates, and More!

In keeping with the IRS mission to confuse as many taxpayers as possible at any given time (sure, they don't tell you this is what it is, but we know the truth), here's a few changes for 2010 you may want to know about:

* Mileage rates. Effective January 1, 2010, the standard mileage rate for business driving is 50 cents a mile, down from the 2009 rate of 55 cents a mile. Taxpayers who drive for medical services or in a job-related move may use a mileage rate of 16.5 cents a mile. That's down from the 2009 rate of 24 cents a mile. The mileage rate for charitable driving is not adjusted annually and remains at 14 cents a mile.

* Health savings accounts. The 2010 limit for deductible contributions to a health savings account (HSA) is set at $3,050 for individuals and $6,150 for family coverage. Individuals who are 55 or older may contribute an additional $1,000.

* The interest rates on tax overpayments and underpayments for the first quarter of 2010 remain the same as they were for the fourth quarter of 2009. The rates are 4% for overpayments and underpayments by individuals. Corporations will pay 4% on underpayments and receive 3% on overpayments. On large corporate underpayments, the interest rate is 6%; the rate paid on large corporate overpayments is 1.5%.

More updates will follow. It's an always changing world out there.

Happy 2010!