How to set your freelance hourly rate (with the math)

Most freelancers pick an hourly rate by looking at what other people charge, dividing an old salary by 2,000 hours, or guessing a number that feels safe to say out loud. All three methods skip the same step: the math. Your rate is not a personality trait. It is the output of a formula with four inputs — the income you want, the costs of running your business, a buffer for taxes, and the hours you can actually bill. This article walks through that formula, works a full example where every number adds up, and covers when the hourly model itself stops being the right tool.

The formula

Here is the whole thing:

Hourly rate = (target annual income + business expenses + tax buffer) ÷ actually-billable hours

Each input deserves a closer look, because the mistakes freelancers make are almost never in the division — they are in underestimating the top of the fraction and overestimating the bottom.

Target annual income

This is what you want to pay yourself, before tax, as a person. Not "whatever is left over." Start from the salary you would accept as an employee doing similar work, then remember that an employer typically also pays for benefits, equipment, insurance contributions, and paid leave. As a freelancer, all of that comes out of your rate. A common rule of thumb is that a freelance income target should sit noticeably above the equivalent salary to break even on total compensation — but the exact gap depends on what benefits cost where you live, so calculate it rather than assuming it.

Business expenses

Everything you spend to be able to work: software subscriptions, hardware and its replacement cycle, accounting or bookkeeping, insurance, a coworking desk or home-office costs, professional development, and payment processing fees. Most freelancers who list these out for the first time are surprised the total is a real number, not a rounding error. Write it down as an annual figure.

Tax buffer

You will owe income tax and, in many countries, some form of self-employment or social contribution on top. Do not use a specific percentage from an article on the internet — including this one. Check your local rates, or ask an accountant, and express the result as "what share of my gross revenue goes to taxes." If that share is, say, 25%, then your gross revenue needs to be your income-plus-expenses total divided by 0.75, not multiplied by 1.25. That distinction matters: dividing by (1 − tax share) grosses up correctly; multiplying by (1 + tax share) undershoots.

Actually-billable hours

This is where most rate calculations quietly fall apart, so it gets its own section.

Why you cannot bill 2,000 hours

The naive math says: 52 weeks × 40 hours = 2,080 hours a year, so divide your target by 2,000 and you are done. In practice, a freelancer's billable hours are a fraction of their working hours, for two separate reasons.

First, you are not at your desk 52 weeks a year. Vacation, public holidays, sick days, and the occasional dead week between projects all come off the top. If you plan for six weeks off in total — and you should plan for time off rather than pretending you will never take any — you are down to 46 working weeks.

Second, and more importantly, not every hour at your desk is billable. Proposals, sales calls, invoicing, bookkeeping, email, marketing, learning new tools, and administrative overhead are all real work that no client pays for directly. This is the split between billable and non-billable hours, and for most solo freelancers the billable share of total working time lands well under 100% — often somewhere around half to two-thirds, as a rule of thumb. Freelancers who have never measured it tend to assume they are far more billable than they are.

The effect on your rate is not subtle. If you price against 2,000 billable hours but actually bill 1,100, your effective rate is 45% lower than you think. This is the single most common reason freelancers who are "fully booked" still feel underpaid: the rate was calculated against hours that never existed.

The fix is to measure. If you track your billable hours accurately alongside your total working hours for even a month or two, you get a real utilization number instead of a hopeful one. This is one place a time tracker earns its keep: Logr, for example, separates billable from total tracked time per project and per client, so your utilization is a number you can read off a screen rather than reconstruct from memory. Until you have real data, use a conservative estimate — 60% of working hours is a defensible starting assumption for someone handling their own sales and admin.

A worked example

Let's put concrete numbers through the formula. Assume a freelancer who wants to pay themselves $70,000 a year, spends $10,000 a year running the business, has determined (from local rates, not a guess) that roughly 25% of gross revenue will go to taxes and contributions, plans six weeks off, and estimates 60% billable utilization.

So the floor is about $97 an hour. In practice you would quote $100 or more, because this calculation contains no margin: no bad-debt allowance for the client who pays late or never, no room for a slow quarter, no profit beyond your own salary. The formula gives you a floor, not a price.

Two things are worth noticing in that table. The tax gross-up in step 4 added almost $27,000 to the revenue requirement — money that passes through your hands but was never yours. And the utilization assumption in step 7 removed 736 hours from the year. Change 60% to 50% and the rate jumps to about $116; change it to 75% and it drops to about $77. No other input moves the answer as much, which is exactly why utilization is worth measuring rather than estimating forever.

The method is currency-agnostic, by the way. The dollar signs above are placeholders; the arithmetic works identically in euros, pounds, or anything else. Only the tax-share input is local.

Hourly vs value and fixed-fee pricing

The formula tells you what an hour must be worth. It does not tell you that hours are the right thing to sell.

Hourly pricing is honest and simple: the client pays for time, you bill for time, and scope changes are automatically absorbed. Its weakness is that it caps your income at your utilization and punishes you for getting faster. If experience lets you do in three hours what used to take ten, hourly billing hands that entire efficiency gain to the client.

Fixed-fee pricing sells an outcome for a set price. You carry the scope risk, but you keep the upside of working efficiently. Value-based pricing goes further and anchors the price to what the outcome is worth to the client rather than what it costs you to produce — sensible when your work has a measurable business impact, hard to apply when it does not.

A practical middle path: keep tracking your hours even on fixed-fee work, then divide each project's fee by the hours it actually took. That effective hourly rate tells you which kinds of projects beat your floor rate and which quietly fall below it. Freelancers who do this usually find that some "great" fixed-fee clients pay an effective rate well under their hourly floor. You cannot see that without the time data.

And whichever model you use, the rate only becomes money once it is on an invoice — invoicing your clients properly is the unglamorous second half of pricing.

When and how to raise your rate

A rate set once and never revisited erodes on its own: your costs rise, your skills improve, and inflation does its quiet work. Some signals that it is time to raise:

• You are consistently fully booked. If you turn work away or run a waitlist, your price is below what the market bears.
• Nobody has pushed back on price in a long time. A rate no prospect ever questions is a rate with headroom. Some price objections are a sign of correct pricing, not a failure.
• Your inputs changed. Redo the formula annually. If expenses, tax rates, or your income target moved, the floor moved.
• Your effective utilization turned out lower than assumed. If the tracking data says you are 50% billable, not 60%, the honest response is a higher rate, not longer weeks.

How to do it: raise rates on new clients first — the new number simply appears in the next proposal, no announcement needed. For existing clients, give notice (30–60 days is a common courtesy), state the new rate plainly, and skip the apologetic essay. "As of [date], my rate will be $X/hour" is a complete sentence. Modest, regular increases are easier for everyone than a shocking correction after five frozen years. Expect to lose the occasional client at the bottom of the price sensitivity range; if a raise loses one client but lifts the rate on all the others, the math usually still comes out ahead — and you can check, because you have the numbers.

Next steps

Run your own numbers through the table above with your real income target, your real expense list, and your local tax share. Then stop guessing at the one input that moves the result most: track your billable and total hours for a month to learn your actual utilization — an open-source, self-hostable tool like Logr works if you want your time data on your own terms, and if you are comparing options, the alternatives overview is a reasonable place to start. Recalculate once you have real data, put the new rate in your next proposal, and set a calendar reminder to redo the whole exercise in a year.