How to Calculate Your Freelance Rate: A Practical Guide
6 min read
How to Calculate Your Freelance Rate: A Practical Guide
One of the biggest mistakes new freelancers make is picking a rate based on what "feels right" or what they earned per hour at their last job. Freelancing carries costs that employment does not, and failing to account for them means you will almost certainly underprice your work. This guide walks through a systematic approach to setting a rate that actually sustains your business.
The Fundamental Formula
At its core, freelance rate calculation is straightforward:
Hourly Rate = (Desired Salary + Business Expenses + Taxes + Profit) / Billable Hours Per Year
The challenge is in accurately estimating each component. Most freelancers underestimate expenses, forget about taxes, and dramatically overestimate how many hours they can actually bill.
Step 1: Define Your Target Salary
Start with the annual salary you want to take home after all business costs. This is your personal compensation, equivalent to what you would earn as an employee before personal income taxes. If you earned $75,000 at your last job, that is a reasonable starting point, though you may want to aim higher since freelancing carries more risk and less stability.
Step 2: Add Your Business Expenses
As a freelancer, you cover costs that an employer would normally handle. Common business expenses include:
- Health insurance: $4,000-$12,000+ per year for individual coverage
- Retirement contributions: 10-15% of income if you want to match typical employer contributions
- Equipment and software: $2,000-$5,000 per year for a computer, software licenses, and tools
- Office space or coworking: $0-$6,000 per year
- Professional development: $500-$2,000 per year for courses, books, and conferences
- Accounting and legal fees: $500-$3,000 per year
- Business insurance: $500-$2,000 per year
A reasonable estimate for total business expenses is $15,000 to $30,000 per year, depending on your field and location.
Step 3: Account for Taxes
Self-employment tax in the United States is 15.3% on the first $168,600 of net earnings (as of 2024), covering both the employer and employee portions of Social Security and Medicare. On top of that, you owe federal and state income taxes.
A common rule of thumb is to set aside 25-35% of your gross freelance income for all taxes combined. The exact amount depends on your total income, filing status, deductions, and state tax rates.
Step 4: Estimate Your Billable Hours
This is where most freelancers go wrong. A full-time employee works roughly 2,080 hours per year (40 hours x 52 weeks). As a freelancer, not all of those hours are billable. You spend significant time on:
- Finding clients and marketing: proposals, networking, social media
- Administrative work: invoicing, bookkeeping, email, contracts
- Professional development: learning new skills, staying current
- Vacation and sick days: you still need time off
A realistic utilization rate for freelancers is 60-70%. That means if you work 40 hours per week, only 24-28 of those hours generate revenue. After accounting for vacation and holidays, most freelancers have roughly 1,000 to 1,400 billable hours per year.
Putting It All Together
Here is a concrete example:
- Target salary: $80,000
- Business expenses: $20,000
- Tax set-aside (30% of gross): calculated after
- Billable hours: 1,200 per year
Before taxes, you need to earn $100,000. At a 30% effective tax rate, you need gross revenue of roughly $143,000. Divide that by 1,200 billable hours, and your hourly rate should be approximately $119 per hour.
Notice how different that is from simply dividing $80,000 by 2,080 hours ($38/hour). That lower number would leave you unable to cover taxes, expenses, or any time off.
Hourly vs. Project vs. Value-Based Pricing
- Hourly pricing is simple and transparent but penalizes efficiency. The faster you work, the less you earn.
- Project pricing (flat fees) rewards efficiency and gives clients cost certainty. Estimate the hours, add a buffer of 15-25%, and multiply by your hourly rate.
- Value-based pricing sets fees based on the value your work delivers to the client rather than the time it takes. This approach can yield significantly higher rates but requires confidence and strong positioning.
Most experienced freelancers use a mix of all three, choosing the model that best fits each client and project.
When to Raise Your Rates
Review your rates at least once per year. Raise them when:
- You are consistently booked with no gaps in your schedule
- Your skills or experience have grown significantly
- Your costs have increased (insurance, software, rent)
- You are turning away work because you are too busy
- Industry rates have moved upward
A good practice is to raise rates for new clients first, then phase increases in for existing clients with advance notice.
Common Pricing Mistakes
- Basing your rate on your last salary without adjusting for freelance costs
- Not tracking time on non-billable work, leading to an inflated utilization estimate
- Competing on price instead of value, which attracts cost-focused clients and erodes margins
- Forgetting to include profit beyond your salary -- your business should generate a return, not just cover costs