How to set your freelance rate without guessing
Almost every freelancer sets their first rate the same way: take the salary they used to earn, or want to earn, and divide it by 2,080 — the number of working hours in a year. Someone targeting $80,000 lands on about $38 an hour, charges $40 to be safe, and feels reasonable about it.
That number is wrong, usually by a factor of close to two. Not because $40 is a bad rate, but because 2,080 is a fantasy: it assumes you work every week of the year and that every hour you work is an hour someone pays for. Neither is true for anyone self-employed. Here's what the calculation actually has to account for.
1. You don't have 2,080 billable hours. You have around 1,200
Start with 52 weeks and take out the time you don't work. Four weeks of vacation and public holidays is modest by most standards; add a few sick days and you're at roughly 47 working weeks. At five days a week and seven focused hours a day, that's about 1,645 hours.
Then take out the work nobody pays you for. Finding clients. Answering enquiries that go nowhere. Writing proposals. Invoicing and chasing invoices. Bookkeeping. Updating your portfolio. Learning the thing you'll need next year. None of it appears on a client invoice, and all of it is your job now.
Freelancers who are honest with their time tracking usually find 60–70% of their working hours are billable, and less than that in the first year, when more of the time goes into finding work than doing it. At 70% of 1,645 hours, you have about 1,150 billable hours in a year — a bit over half of 2,080.
The single most common mistake: assuming a busy week means a billable week. Being busy for 45 hours and invoicing for 25 of them is the normal shape of a freelance week, not a sign you're doing it badly.
2. Your rate has to cover what an employer used to pay for
A salary is not what you cost your employer. On top of it, they were paying the employer half of payroll taxes, and often health insurance, equipment, software licences, a pension contribution, and the paid days when you weren't working. As a freelancer you pay all of that out of your own invoices.
The tax piece is the one that catches people. In the US, self-employed people pay both halves of Social Security and Medicare — the 15.3% self-employment tax — on top of income tax. Most countries have an equivalent: a social contribution an employee splits with an employer and a freelancer pays alone. It comes out of the same hourly rate.
So your target take-home income has to be grossed up for tax before you divide it by anything, and your annual business costs have to be added on top:
- Software and subscriptions — the small monthly ones add up faster than expected
- Hardware, amortised over the years you'll actually use it
- Insurance — professional liability, and health cover where that isn't public
- Accounting, if you don't want to do your own returns
- Pension or retirement contributions, which no employer is making for you any more
- Training, conferences, a co-working desk if you use one
3. Put it together
The whole calculation is one line:
(income you want after tax, grossed up for tax + annual business costs) ÷ billable hours per year = your minimum rate
Take the $80,000 target from the start. Grossed up at a 25% effective tax rate, that's about $106,700. Add $4,000 of business costs and you need roughly $110,700 of revenue. Divide by 1,150 billable hours and your rate is about $96 an hour — not $38.
That number is often a shock. It's also why freelancers who charge "a bit more than my old salary rate" end up working constantly and wondering where the money went. They didn't price the job wrong; they priced a different job.
Run your own numbers → The hourly rate calculator does this arithmetic with your figures and shows every step, so you can see which assumption is driving the result.4. That's a floor, not a price
Everything above tells you the rate below which freelancing costs you money compared to a job. It says nothing about what your work is worth to a client, which is a completely different question — and usually a higher number.
Clients don't buy hours. They buy an outcome: a site that converts, a case that gets resolved, a system that stops falling over. A rate that's justified by the value of that outcome can sit well above your cost floor, and the gap between the two is your actual profit margin.
So use the floor as a filter, not a price list. If a project can't clear it, it isn't a bargain you're offering, it's a loss you're funding. Above it, price by what the work is worth and what comparable freelancers in your market charge — ask peers, check the rates in job posts for contract roles, and pay attention to who says yes too quickly.
5. When to raise it
A few reliable signals that your rate is too low:
- Nobody negotiates. If every client accepts your first number without blinking, you're under market.
- You're fully booked and still not making your target. More hours can't fix a rate problem — you've run out of hours.
- You resent the work. Underpricing feels like a discipline problem long before it feels like a pricing problem.
- Your costs rose and your rate didn't. An unchanged rate is a pay cut every year inflation exists.
Raise new-client rates first — that's free. Existing clients get notice, a specific date, and no apology or lengthy justification: "From January my rate is X." Some will leave. In practice the ones who leave over a 15% increase are usually the ones taking the most time for the least money.
6. Hourly isn't the only option
Hourly billing has a structural problem: the better you get, the faster you work, and the less you earn for the same result. Two common alternatives:
Fixed project price. You quote the outcome, not the time. Requires a scope you can defend and a written change process, or you absorb every "small addition". Your hourly floor is what tells you whether the quote is sane — estimate the hours, apply the rate, add a buffer for the parts that always take longer.
Monthly retainer. A fixed fee for ongoing availability or a defined block of work. Predictable for both sides, and the closest thing to stable income in freelancing. Price it against your rate, and cap what it includes, or it quietly becomes a full-time job at part-time pay.
Both still rest on knowing your hourly floor. It's the number underneath every other pricing decision — which is why it's worth calculating properly once rather than guessing repeatedly.
Related
Once you know what you're charging, the next question is what you keep: see how quarterly estimated taxes work if you're in the US, and invoicing basics for getting the money in on time.
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