How to Calculate Your Freelance Hourly Rate (The Formula Nobody Teaches You)

My first freelance rate was $45/hour. I picked it because it was “more than my salary” — I was making about $65K as an employee, which works out to roughly $31/hour. So $45/hour felt like a raise.

Except it wasn’t. After taxes (30%), health insurance ($600/month), retirement savings, software, and all the non-billable hours I didn’t account for, my effective hourly rate was about $22. Less than my day job. I’d taken a pay cut to work harder.

The problem? I was calculating freelance rates like an employee. As an employee, someone else pays half your taxes, provides health insurance, gives you paid vacation, buys your equipment, and pays you for every hour you’re at work — even the ones you spend in meetings or refilling your coffee.

As a freelancer, you pay for all of that yourself. And a huge chunk of your time is non-billable. Your hourly rate needs to account for everything.

Here’s the formula that fixed my pricing.

The Real Formula

Your hourly rate = (Desired salary + Taxes + Expenses + Benefits) ÷ Billable hours per year

Let me break down each component with my actual numbers.

Step 1: Desired Annual Salary (Take-Home Pay)

This is what you want to actually take home after everything else is paid. Not gross income — net, spendable money.

I wanted to take home $72,000/year ($6,000/month). This covers my rent, food, car, personal expenses, and lifestyle. Your number might be higher or lower.

My number: $72,000

Step 2: Taxes

As a freelancer, you owe roughly 25-30% of gross income in taxes (federal income tax + self-employment tax + state tax). To take home $72K, you need to earn enough gross income to pay taxes and still have $72K left.

The math: $72,000 ÷ (1 - 0.28) = $100,000 gross income needed Taxes on that: $100,000 × 0.28 = $28,000

My number: $28,000

Step 3: Business Expenses

Add up everything you spend to run your business annually:

My number: $7,500 (rounded)

Step 4: Benefits You Need to Self-Fund

As an employee, these are “free” (they’re not — they come out of your compensation package, but you don’t see it). As a freelancer, you pay out of pocket:

My number: $14,400

Step 5: Total Revenue Needed

$72,000 (salary) + $28,000 (taxes) + $7,500 (expenses) + $14,400 (benefits) = $121,900/year

Step 6: Billable Hours Per Year

This is where most freelancers get the math catastrophically wrong. You don’t work 2,080 billable hours per year (40 hours × 52 weeks). Not even close.

Start with total available hours: 52 weeks × 40 hours = 2,080 hours

Subtract non-working time:

• Vacation: 3 weeks = -120 hours
• Holidays: 10 days = -80 hours
• Sick days: 5 days = -40 hours
• Working hours: 1,840

Subtract non-billable working time: This is the killer. As a freelancer, you spend significant time on tasks that aren’t billable:

• Marketing/finding clients: 5 hours/week = 260 hours/year
• Admin (invoicing, bookkeeping, emails): 5 hours/week = 260 hours/year
• Proposals and estimates: 3 hours/week = 156 hours/year
• Professional development: 2 hours/week = 104 hours/year
• Total non-billable: 780 hours

Actual billable hours: 1,840 - 780 = 1,060 hours/year

That’s about 20 billable hours per week. Not 40. Twenty.

Some experienced freelancers with steady retainer clients might hit 25-28 billable hours. New freelancers might be at 15. I average about 22.

My number: 1,060 billable hours

Step 7: Calculate Your Rate

$121,900 ÷ 1,060 = $115/hour

Not $45/hour. $115/hour. That’s what I need to charge to take home $72K/year, cover all my taxes and expenses, fund my benefits, and not work myself to death.

Why Your Rate Feels “Too High”

When I first calculated $115/hour, I thought “nobody will pay that.” I was wrong. But the psychological barrier is real, so let me address it.

Compare to what companies pay for employees:

An employee earning $72K/year actually costs their employer about $95-110K when you add:

• Employer payroll taxes (7.65%)
• Health insurance ($6,000-15,000/year)
• Retirement match (3-6% of salary)
• Office space, equipment, software
• HR, management overhead

So when a company hires you at $115/hour, they’re paying roughly the same as they’d pay a full-time employee with your skills. Except they don’t owe you benefits, PTO, or severance. They get flexibility. You get freedom. The math works for both sides.

Your rate is not your worth as a person. It’s a business calculation. It’s the number that makes your freelance business sustainable. If you charge less, your business is subsidizing your clients at your expense.

The Rate Adjustment Table

Here’s what rates look like at different target incomes:

If you’re currently charging $50/hour and wondering why you’re stressed and broke, the math above explains it. At $50/hour × 1,060 billable hours, you gross $53,000. After taxes, expenses, and benefits, you take home about $30,000. That’s poverty wages for a skilled professional.

Why I Switched to Project-Based Pricing

I used the hourly rate calculation for my first year. Then I switched to project pricing and my income jumped 30% on the same amount of work.

The problem with hourly billing: It punishes expertise. As I got better and faster at my work, projects took fewer hours. A website that took me 40 hours in year 1 took me 25 hours in year 2. At $115/hour, my income on the same project dropped from $4,600 to $2,875 — even though the client got the same (or better) result.

Project pricing flips this: Instead of billing for time, I bill for the outcome. “This website will cost $5,000” regardless of whether it takes me 20 hours or 35 hours. If I’m efficient, I earn more per hour. My expertise becomes an asset, not a liability.

How I use the hourly rate for project pricing: I still calculate my hourly rate, but I use it internally. I estimate how many hours a project will take, multiply by my hourly rate, add a 15-20% buffer for scope uncertainty, and that becomes my project price.

Example:

• Estimated hours: 30
• Hourly rate: $115
• Base price: $3,450
• Buffer (15%): $518
• Project price: $4,000 (rounded for clean numbers)

The client sees “$4,000 for a website.” They don’t know or care about my hourly math. They evaluate whether $4,000 is fair for the outcome they’re getting.

Rate Negotiation: What I’ve Learned

When a prospect says your rate is too high:

1. Don’t immediately lower your rate. Ask what their budget is.
2. If their budget is reasonable, adjust the scope to fit (fewer features, less revision, simpler approach).
3. If their budget is unrealistically low, politely decline. Not every client is your client.

When to discount:

• Interesting projects that build your portfolio
• Long-term retainers (stable monthly income is worth a 10-15% discount)
• Nonprofit or cause you genuinely care about
• Never discount just because a client asks

When to charge more:

• Rush jobs (1.5-2x for urgent timelines)
• Complex or specialized work
• Clients with big budgets (enterprise companies expect higher rates)
• Scope that involves managing subcontractors or additional complexity

The Spreadsheet

I keep a simple Google Sheet that I update annually:

I review this in January each year and adjust for:

• Inflation
• Increasing expenses (health insurance always goes up)
• Increased expertise (my value increases annually)
• Market conditions

My rate has gone from $45 (clueless year 1) to $85 (year 1 after doing the math) to $100 (year 2) to $115 (year 3) to $130 (year 4, current). Each increase felt scary. None lost me clients that I missed.

The Bottom Line

Your freelance rate isn’t a feeling. It’s a math problem. Calculate what you need to earn, divide by realistic billable hours, and that’s your minimum rate. If the number feels high, that’s not the number being wrong — it’s your calibration adjusting from employee thinking to business-owner thinking.

Charge what the math says. Your business depends on it.