Writers: Stop Losing Money – Use This Fee Formula


By Gary A. Hensley

This post is directed to those writers, editors, illustrators, and others who are asked to submit a quotation for an assignment after the requirements and due date have been outlined (or, just as likely, the client will propose a fee amount they want to pay and ask you if that’s acceptable).  First, take a deep breath and probe for assignment details.

You need to gather complete information about the assignment upfront to determine: (1) if travel will be involved (and, if so, will that be reimbursed separately from your fee or not and when?); (2) what supplies you will need to accomplish the assignment (including photography); and (3) communication costs (telephone calls, faxes, regular and express mail,  etc.).  Each assignment will have its unique costs.  You need to identify all of them and accurately estimate their cost before you submit your fee quotation (or accept the one offered).  Believe it or not, this is just step one of your bid quotation (acceptance) process.

Step two is to factor in an amount for your general overhead or indirect expenses (your home office expenses, office supplies, continuing education in your field, insurance, dues, subscriptions, etc.).   This will vary, depending on the size and volume of your business operation, but, for our purposes here, we will use an overhead rate of 20% of the estimated direct expenses.

Step three is needed to “cover” the income and self-employment taxes related to the assignment.  For 2013, we will choose a conservative  income tax rate of 15% and add the 15.3% self-employment tax [see yesterday’s post  –“Writers and the Self-Employment Tax” for more details] rate to this for a combined amount of 30% (rounded down).  Many self-employed professionals fail to factor in the cost of their tax bite when bidding or accepting freelance work.  You cannot make an after-tax profit unless you do.  And….the point of your “business” endeavor (not hobby) is to end up with positive cashflow (cash in your bank account) after all expenses have been covered.

Step four is used to factor in your desired after-tax profit (the money left after all expenses are covered, including taxes) to compensate you for the value of your professional services.  This percentage will vary based on your experience, reputation, notoriety, and market forces.

Scenario

Mark Twane has been offered a writing assignment that will involve expenses (supplies) and unreimbursed travel.  Mark estimates the direct job expenses will be $1,000 [Step One].  He figures his average overhead is 20% of his direct costs.  $1,000 of direct expenses times 20% for overhead equals $200 [Step Two]; therefore, direct and indirect expenses total $1,200.   Mark is currently in the combined 30% federal income tax and self-employment tax bracket [Step Three] discussed above.  He needs to cover that amount in his bid and he has determined that he wants to clear 20% on each job [Step Four] for his skills after-tax.

I apologize in advance since you were lured in believing there would be no math.

Let me illustrate this process:

“X” is the unknown amount that Mark needs as a quotation starting point.

To solve for X, we will use Mark’s numbers from above:

X = $1,200 + .30(X – 1,200) + .20X, then

X = $1,200 + (.30X – 360) + .20X, then

.50X = $1,200 – $360, then

.50X = $840, and, finally X = $1,680  ($840/1-.50)

Given Mark’s expenses, tax bracket and after-tax profit goal, he needs to quote a price of $1,680 (round off to $1,700).  Here is the proof:

Quote amount =                                      $1,680

Less: direct and indirect expenses            1,200

Equals taxable profit                                      480

Less: taxes @ 30%                                        144

Equals after-tax profit                                     336

336/1,680 = 20% after-tax profit goal

If Mark is “offered” anything over $1,680, he will accept the assignment.  If he really wants this assignment to break into a new market and is willing to accept a 10% after-tax profit, his quote (or acceptance fee) would drop to $1,400 ($840/.60).  His breakeven price would be $1,200 just to cover costs since there would be no taxes due on zero profit and he has decided to forego any after-tax profit.

Your tax burden percentage and your desired after-tax profit percentage target can be easily substituted in the above scenario to determine a starting point for job quotations.  You may have to reduce your after-tax profit percentage target based on your current workload (not enough work), in order to break into a new market, or for other competitive reasons.  The promise of future work or a long-term contract would also affect your pricing.

You should develop an Assignment Quotation Worksheet (using Microsoft Excel or other software) to record all estimated direct costs, general overhead percentage, your tax burden and your desired after-tax profit to easily and quickly determine your initial fee amount.  Make a separate column for “actual direct costs” so you can track and compare this to your estimates (and to help you refine your cost estimates in the future).  If the “scope” of the assignment should expand, create an addendum worksheet, separate from the original, and place it in your assignment file.

If you are audited by the IRS, this documentation will make you look like a “business” and not a “hobby.”   [See my previous post “Professional Writer or Hobbyist?”].  Don’t get so excited about an assignment opportunity that you spend your personal funds to complete it (at least not unknowingly).

© 2012 Gary A. Hensley

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s