Setting your freelance rate is one of the most important decisions you'll make as an independent worker. Charge too little and you'll struggle; charge too much and you might lose clients. Here's how to calculate it properly.
The Basic Formula
**Hourly Rate = (Desired Annual Income + Expenses) / (Billable Hours Per Year)**
Step 1: Determine Your Desired Annual Income
Start with what you want to earn, not what you think clients will pay. If you want $100,000/year, start there.
Step 2: Add Business Expenses
Freelancers have costs that employees don't:
- Self-employment tax (15.3% in the US)
- Health insurance
- Software and tools
- Home office expenses
- Professional development
- Retirement contributions
Add 30-40% to your desired income to cover these.
Step 3: Calculate Billable Hours
You won't bill 40 hours/week. A realistic breakdown:
- 52 weeks × 40 hours = 2,080 hours
- Minus holidays, sick days, vacation: -240 hours
- Minus admin, marketing, non-billable work: -600 hours
- **Billable hours: ~1,240 per year**
Step 4: Do the Math
- Desired income: $100,000
- Plus 35% for expenses: $135,000
- Divided by 1,240 billable hours
- **Hourly rate: $108.87/hour**
Common Mistakes
1. **Forgetting non-billable time**: You spend time marketing, invoicing, and on admin. Only 60-70% of your time is billable. 2. **Ignoring self-employment tax**: At 15.3%, this is a significant cost. 3. **Not accounting for benefits**: Health insurance, retirement, and paid time off are built into employee salaries but not freelance rates. 4. **Setting rates too low**: It's easier to lower your rate later than to raise it.
Value-Based Pricing
Once you know your baseline hourly rate, consider value-based pricing for larger projects. If your work saves a client $50,000, charging $5,000 is reasonable — even if it only takes you 10 hours.
Use our Freelance Rate Calculator to calculate your rate, then compare with our Salary Calculator to see how it stacks up against a traditional salary.