Do freelancers have COGS?

Service-based freelancers typically have minimal or no COGS because they are selling time and expertise rather than physical products. However, freelancers who sell physical or digital products — such as handmade goods, print-on-demand merchandise, digital templates, or stock content — do have COGS. COGS for digital product sellers includes platform fees, payment processing costs, and any direct costs of creating the product.

What is the difference between COGS and operating expenses?

COGS (also called cost of sales) is directly tied to producing or acquiring the goods being sold — it varies with revenue. Operating expenses (such as rent, software subscriptions, marketing, and professional services) are indirect costs of running the business that do not vary directly with sales volume.

Accounting

What is Cost of Goods Sold (COGS)?

Q: What is Cost of Goods Sold (COGS)?

Cost of Goods Sold (COGS) is the direct cost of producing the goods that a business sells — including the cost of raw materials, direct labor, and manufacturing overhead. It does not include indirect expenses like marketing, rent, or administrative salaries.

The direct costs of producing the goods sold by a business — materials, labor, and direct overhead.

Definition

Cost of Goods Sold (COGS) is the total direct cost incurred to produce or acquire the goods that a business sells during a specific period. This includes the cost of raw materials, direct labor costs (workers who physically make the product), and manufacturing overhead directly tied to production. COGS is subtracted from revenue to calculate gross profit: Revenue − COGS = Gross Profit.

COGS for Product Businesses

For a manufacturing or retail business, COGS includes: the cost of raw materials and components, direct labor (wages of workers who assemble or manufacture the product), freight and shipping to bring materials in, import duties and tariffs on components, and factory overhead allocated to each unit produced. For example, a furniture maker's COGS includes wood, hardware, finishing materials, and the wages of the craftspeople building each piece.

COGS for Freelancers and Service Businesses

Service-based freelancers generally have very little or no COGS because they are selling time, expertise, and creative labor rather than physical goods. However, certain freelancers do have meaningful COGS: a freelance photographer who sells prints has printing and framing costs as COGS; a digital product creator selling templates or fonts has platform transaction fees as COGS; a custom merchandise seller has production and shipping costs as COGS. Most traditional freelance services — writing, design, consulting, development — have COGS close to zero.

Why COGS Matters

COGS is a critical component of calculating gross margin — the percentage of revenue that exceeds the direct cost of production. A business with 70% gross margin retains 70 cents of every dollar of revenue after covering direct costs, which must then cover operating expenses and generate profit. Understanding COGS helps freelancers who sell products price competitively: if your COGS is too high relative to your selling price, you may be losing money on each sale without realizing it.

Calculating and Recording COGS

COGS = Beginning Inventory + Purchases During Period − Ending Inventory. For freelancers with simple product businesses, this can be calculated at year-end. The journal entry to record COGS reduces inventory (an asset) and records the expense. Accurate COGS calculation requires maintaining records of beginning and ending inventory values and all direct costs incurred during the period. Eonebill and accounting software can help track these costs if you sell products alongside your freelance services.

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