How to set your freelance hourly rate

Start from what you need, not from what others charge

Many new freelancers set a rate by looking at what an employee in the same job earns per hour, or by copying a number from a competitor's website. Both are weak starting points because they ignore your own costs and your own time. A better approach works backward: decide how much income you need, add the costs of running the business, and spread the total over the hours you can honestly invoice.

That is what the Hourly Rate Calculator on EveryFix does. It takes four inputs, desired annual income, annual business expenses, billable hours per week, and weeks off per year, and returns the hourly rate that covers them. The result is a floor: the minimum average rate at which your plan works. The market, your experience, and the value you deliver can all justify charging more.

The formula, step by step

First find the number of billable weeks: 52 minus the weeks you take off. Then multiply by your billable hours per week to get total billable hours for the year. Finally divide your income goal plus your expenses by those hours.

The tool's own example is a photographer who wants to take home $60,000 and has $5,000 in annual expenses, a combined $65,000 to recover through billing. She expects 30 billable hours a week and takes 4 weeks off. That gives 48 billable weeks and 30 x 48 = 1,440 billable hours. The required rate is 65,000 / 1,440 = $45.14 an hour. Notice that expenses are part of what you must bill, because every dollar spent on software or insurance has to come out of revenue before you can keep anything.

Billable hours are the number that changes everything

A full-time employee is paid for roughly 40 hours a week. A freelancer is paid only for the hours that clients are billed for. Time spent finding clients, sending proposals, invoicing, bookkeeping, answering emails, learning new tools, and handling revisions that fall outside the scope is real work, but it usually is not invoiceable. That is why realistic billable hours are often well below total working hours.

As an illustration, imagine a 40-hour week that splits into 25 hours of client work, 5 hours of admin and bookkeeping, 6 hours of marketing and proposals, and 4 hours of learning and unpaid revisions. Only the first 25 hours produce an invoice, yet all 40 hours are your working life. Your own split will differ, and it often shifts with the season, but the pattern of billing well under the hours you work is very common among people who work for themselves.

Compare two ways of reaching the same goal. Dividing $80,000 by the 2,080 hours in a standard 40-hour, 52-week year gives $38.46 an hour. Now assume 25 billable hours a week, 3 weeks off, and $10,000 of expenses. That is 49 billable weeks and 1,225 hours, and the required rate is 90,000 / 1,225 = $73.47 an hour. Same income goal, nearly double the rate, because fewer hours carry the whole load. Here the freelancer bills about 59 percent of the 2,080 hours a calendar year contains.

Small changes to the hours have a large effect. Moving from 30 billable hours to 25 raises the rate by 20 percent, because 30 / 25 = 1.2. In the photographer example the rate goes from $45.14 to $54.17. Moving from 3 weeks off to 1 week off lowers the $73.47 figure to $70.59, about 4 percent. There is no right answer for how many hours you can bill; track your own time for a few months and use that number rather than a hope.

Taxes: why take-home income is not the whole story

The calculator treats your desired annual income as the amount you want to keep, and it does not add anything for income tax or self-employment tax. If you enter your after-tax goal, the rate it returns will be too low.

In the United States, self-employed people generally pay self-employment tax, which covers Social Security and Medicare. The IRS states the rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. According to the IRS, the amount subject to the tax is generally 92.35 percent of your net earnings from self-employment, which makes the effective rate on net earnings about 14.1 percent (0.153 x 0.9235). The IRS also says the law sets a maximum amount of net earnings subject to the Social Security portion, and that amount changes annually, so check the current figure. You usually must pay it if net earnings are $400 or more, and you can deduct one-half of the tax when figuring adjusted gross income. This is separate from federal, and often state, income tax.

As an illustration, suppose net earnings are $80,000. The taxable base is 80,000 x 0.9235 = $73,880, and self-employment tax is about $11,304 (about $5,652 of it deductible for income tax). Income tax comes on top. Assume, purely as a hypothetical, that all taxes together take about 25 percent of net profit. To keep $60,000 you would need net profit of 60,000 / 0.75 = $80,000. Add the $5,000 of expenses and divide by 1,440 hours, and the rate is 85,000 / 1,440 = $59.03 an hour, not $45.14. A 30 percent combined assumption would give about $63.00 an hour. Your own figure depends on your location, filing status, and deductions, so use a tax estimate or a professional rather than this placeholder.

What to count as business expenses

The expenses field is easy to underfill. Expenses are not just receipts for equipment; for a self-employed person, they include the costs an employer would otherwise cover. A reasonable list gives a more honest rate.

• Software, subscriptions, domain and hosting
• Equipment and replacement cycles, spread across the years you will use it
• Business insurance and professional fees such as accounting
• Health insurance premiums and retirement contributions you fund yourself
• Marketing, coworking or office space, and professional development
• A buffer for slow months and late-paying clients

Using the rate, and a quirk to know about

To see the effect of one cost, add it and recalculate. Adding $7,200 of health insurance to the photographer's expenses raises the total to $72,200 and the rate to 72,200 / 1,440 = $50.14 an hour, a $5.00 increase.

A rate is also easy to misread when converting back to an annual number. Typing $45.14 into the Hourly to Salary Calculator at 40 hours and 50 weeks shows about $90,280, but you will bill only 1,440 hours, which is about $65,002. The two tools answer different questions. Once you have an hourly rate, the Freelance Project Rate Calculator turns it into a project quote: hours x rate plus expenses, multiplied by one plus your profit margin. The Break-Even Calculator is useful if you sell products or fixed-cost services alongside time.

One quirk: the weeks-off field falls back to 2 weeks when it is 0 or left blank, because a zero is treated as missing. If you want to model almost no time off, enter 1 instead of 0, and bear in mind that planning for no vacation, holidays, or sick days is rarely realistic.

Hourly rate or project price?

An hourly rate is a planning tool even if you never quote it to a client. Many freelancers use it to build fixed project prices, because a project price rewards efficiency while an hourly bill penalizes it. If you estimate a job at 60 hours and your required rate is $75, labor is $4,500; add direct expenses and a margin on top and you have a quote that protects your target. The risk is underestimating the hours, so many people pad estimates for revisions and communication.

Whichever way you bill, compare your calculated rate with what similar work earns in your market before you commit. If the market rate is well above your minimum, you have room to price higher. If it is below, the gap tells you which assumptions to revisit: your hours, your expenses, or the income goal. Revisit the calculation at least once a year, because costs, tax situations, and demand all move.

Common mistakes

Most underpriced freelancers made the same few errors, and they are all fixable before the first invoice.

• Dividing by all working hours instead of billable hours
• Entering a pre-tax income goal and treating the result as if taxes were handled
• Leaving health insurance, retirement, and equipment replacement out of expenses
• Planning zero weeks off, so one illness breaks the budget
• Never raising the rate even as skills and demand grow
• Assuming the calculated rate is the market rate: it is your minimum, not a ceiling