How to Calculate Your Freelance Hourly Rate (Worked Example)

Why dividing your old salary by 2,080 undercharges, the four-step formula to use instead, and a worked example showing how billable hours set your rate.

Instant Sheet Templates Editorial Team · 8 min read · 2026-10-26

Why the Salary Shortcut Fails

The most common way new freelancers set a rate is to take the salary they earned as an employee and divide it by 2,080 — 52 weeks × 40 hours. On a $70,000 salary that gives about $33.65 an hour. It feels reasonable, and it is almost always far too low, for three reasons:

• An employer paid costs you now pay yourself: equipment, software, health insurance, paid holidays, and (in the US) half of Social Security and Medicare tax.
• You will not bill 40 hours a week. Finding clients, quoting, invoicing, bookkeeping and admin all take time nobody pays for.
• You will take time off, and nobody pays for that either.

The fix is to work backwards from the income you want, not forwards from a salary.

The Four-Step Formula

1. Gross needed = (target take-home income + yearly business costs) ÷ (1 − tax set-aside %)
2. Billable weeks = 52 − weeks off (holidays, sick days, public holidays, training)
3. Billable hours = billable weeks × billable hours per week
4. Hourly rate = gross needed ÷ billable hours

This is the same method our freelance hourly rate calculator uses, so you can check every step below against it.

Worked Example

Alex is a freelance designer who wants $70,000 a year to live on.

Step 1 — business costs for the year

• Software subscriptions: $1,800
• Computer and equipment (spread over its life): $1,200
• Health insurance: $6,000
• Accountant, business insurance and bank/payment fees: $1,500
• Phone, internet and home-office share: $1,500
• Total business costs = $12,000

Step 2 — gross up for tax

Alex's accountant suggests setting aside 28% for income and self-employment tax.

Gross needed = ($70,000 + $12,000) ÷ (1 − 0.28) = $82,000 ÷ 0.72 = $113,888.89

Step 3 — realistic billable hours

Six weeks off (vacation, public holidays and a buffer for sickness) leaves 46 working weeks. Alex works about 40 hours a week but bills 25 of them; the rest is sales, admin and learning.

Billable hours = 46 × 25 = 1,150 hours

Step 4 — the rate

Hourly rate = $113,888.89 ÷ 1,150 = $99.03 per hour, so about $100/hour. A 7-hour billable day is about $700.

That is nearly three times the $33.65 the salary shortcut gave — and it is what the same $70,000 lifestyle actually costs when you are self-employed.

How Billable Hours Change the Rate

Holding everything else from the example the same (gross needed $113,888.89, 46 working weeks):

• 20 billable hours/week → 920 hours → $123.79/hour
• 25 billable hours/week → 1,150 hours → $99.03/hour
• 30 billable hours/week → 1,380 hours → $82.53/hour

Billable hours are the lever most people get wrong. Track a month of your real time before you trust any number above 25–30 hours a week.

About the Tax Set-Aside

The tax line is a set-aside percentage, not a tax calculation. In the US, self-employed people pay self-employment tax — 15.3% for Social Security and Medicare, applied to 92.35% of net self-employment earnings, with the Social Security part capped each year — on top of federal and any state income tax. That is why many freelancers set aside 25–30% of profit, but the right figure depends on your income, state, deductions and filing status. Ask your accountant for your number, and read our guide to tax deductions for freelancers so your business costs are claimed properly.

Sanity-Check Against the Market

Your calculated rate is your *floor* — the rate below which the business does not pay you what you planned. Then compare it with what clients in your field pay:

• If the market rate is above your floor, charge the market rate.
• If the market rate is below your floor, you need more billable hours, lower costs, a higher-value niche, or a different pricing model.

Hourly, Day Rate or Project Price?

• Hourly suits open-ended work and clients who change their minds.
• Day rate (hourly × billable hours per day) suits on-site or workshop days.
• Project price rewards you for working efficiently. Estimate the hours, multiply by your rate, add 10–20% for revisions and unknowns, and fix the scope in a freelance contract.

Raise Your Rate Without Losing Clients

• Give existing clients 30–60 days' notice in writing.
• Apply the new rate to new clients immediately.
• Review your numbers once a year; costs, tax and your skills all change.

Next Steps

Run your own numbers in the freelance hourly rate calculator, then bill at that rate with the invoice generator or the freelance invoice template. For what every invoice needs to get paid on time, see how to write a professional invoice.

Related reading: Tax deductions for freelancers and How to Write a Professional Invoice.