How to set your freelance rate: a formula that covers taxes and downtime

The most common freelance mistake is taking an old salary, dividing by 2,080 hours and calling it an hourly rate. That number ignores taxes, business costs, holidays and the hours nobody pays you for. Freelancers who price that way often work more than before and earn less. Here is a formula that works from the income you actually want.

Step 1: Start with your target take-home pay

Decide what you want to keep after tax each year, the equivalent of a salary. Include contributions you would previously have received from an employer, such as retirement savings or health cover.

Step 2: Add tax

Freelancers usually pay their own income tax and social contributions, and in some countries the employer share too. To get the pre-tax amount you need:

Revenue needed before costs = take-home ÷ (1 − tax rate)

With a $60,000 take-home target and an estimated 25% overall tax rate: $60,000 ÷ 0.75 = $80,000.

Step 3: Add business costs

Add everything the business pays for in a year: software, equipment, insurance, accounting, training, coworking, marketing and payment fees. Say $6,000, giving a total revenue target of $86,000.

Step 4: Count billable hours realistically

You will not bill 40 hours a week, 52 weeks a year. Subtract:

• Holidays, sick days and public holidays: working perhaps 46 weeks a year
• Unbilled work: sales, proposals, admin, invoicing and learning, often a third or more of your time

A realistic estimate might be 25 billable hours a week × 46 weeks = 1,150 hours a year.

Step 5: Divide

Hourly rate = revenue target ÷ billable hours

$86,000 ÷ 1,150 hours = about $75 an hour, or about $600 for an 8-hour day.

Compare that with the naive approach: $60,000 ÷ 2,080 hours = $29 an hour. Charging $29 would leave you earning a fraction of the target once taxes, costs and unbilled time are counted.

Use the calculator below to run your own numbers.

Step 6: Check against the market

Your formula sets the minimum you can charge to reach your goals. The market sets what clients will pay. Research rates for your skill, experience and location in freelancer communities, salary surveys and job boards. If the market rate is far below your minimum, you may need to specialise, change clients or adjust the target.

Beyond hourly: day rates, projects and retainers

• Day rates reduce clock-watching and work well for embedded, on-site or full-day engagements.
• Project pricing rewards efficiency: if you finish faster, you keep the difference. Estimate hours carefully and add a buffer for revisions.
• Value-based pricing ties the fee to the outcome for the client, for example a share of the revenue a new landing page is expected to bring.
• Retainers give you predictable monthly income for an agreed amount of availability or work.

Most freelancers start hourly and move toward projects and retainers as they learn how long work really takes.

How to raise your rates

• Raise rates for new clients first, so your pipeline sets the new standard.
• Give existing clients notice, commonly 30 to 60 days, with a clear date and a short note on the value you deliver.
• Raise rates regularly, for example once a year, instead of rarely and by a lot.
• Expect to lose some clients. At a higher rate you can earn the same with fewer, better clients and gain time to find new ones.

Protect yourself

• Use a written agreement that covers scope, revisions, payment terms and late fees.
• Take a deposit on projects, often 25% to 50% upfront.
• Keep a tax reserve: move a fixed percentage of every payment into a separate account.
• Build a larger emergency fund than an employee would, since income varies.

Tip: Track your actual billable hours for a month. Most new freelancers discover they bill fewer hours than they assumed, and that their rate needs to be higher than they thought.

This guide is general information, not tax or legal advice. Tax rates and freelancer obligations vary by country.