How to set a freelance hourly rate from the income you want, not the salary you had

The question every new freelancer asks is “what should I charge an hour”, and the usual first answer, old salary divided by 2,080, is wrong by a factor of two or three. The rate you need is your target income plus business costs, grossed up for tax, divided by the hours a client will actually pay for, which is nearer 1,100 a year than 2,080. This guide walks through each component, shows how the hours disappear, and works a full example to an hourly rate and a day rate.

Why salary divided by 2,080 understates the rate

A 40-hour week over 52 weeks is 2,080 hours, so a 70,000 salary is 33.65 an hour. That is a fair description of an employee’s pay, because the employer pays for all 2,080 hours whether they are spent on client work, meetings, training, holiday or a sick day. The employer also pays its share of social security, pension contributions, insurance and the cost of a desk and a laptop on top of the salary.

None of that is true once you freelance. You are paid only for hours a client signs off, you fund every holiday and sick day yourself, you buy your own equipment and cover, and you pay both halves of the social contributions. Charging 33.65 an hour would leave you earning a fraction of the old salary while working the same hours, and the gap only becomes obvious at the end of the first year.

The components of a freelance rate

Start with the target income, the amount you want to keep for yourself each year after the business has paid its own bills and after tax. Then add business expenses: software, insurance, equipment spread over its useful life, accounting, a coworking desk, training. Next comes tax and benefits. Use your expected combined rate on what you earn, which in the US means federal and state income tax plus the 15.3% self-employment tax, and in the UK means income tax plus Class 4 National Insurance; 25% to 35% is typical for a mid-income sole trader. If you want the equivalent of an employer pension contribution or health cover, treat it as an expense and add it in.

The other components are about time rather than money. Vacation, public holidays, sick days and gaps between contracts remove whole weeks from the year. Unbillable time removes a share of the weeks that remain: proposals, sales calls, invoicing, bookkeeping, marketing and learning are all work nobody pays you for. Utilization, or billable share, is the fraction of your working hours that end up on an invoice. Established freelancers usually land between 55% and 70%; people starting out, or juggling many small projects, are often nearer 50%. Finally, most people add a profit buffer of around 10% so that a late payer or a dead laptop does not push them under target.

How 2,080 hours become 1,100

Step	Hours left in the year
52 weeks × 40 hours	2,080
Take out 4 weeks of vacation and public holidays	1,920
Take out 2 more weeks for sick days and gaps between clients	1,840
Bill 65% of the remaining hours	1,196
Bill 60% of the remaining hours	1,104
Bill 55% of the remaining hours	1,012

Six weeks off and a 60% billable share, which are the defaults in the freelance hourly rate calculator, leave 1,104 billable hours. That is roughly half the hours an employee is paid for, and it is why a freelance rate has to be roughly double an hourly salary before expenses and extra tax are even considered. A realistic range for most solo professionals is 1,000 to 1,200 billable hours a year. If your plan assumes 1,600 or more, check it against a real calendar.

Worked example: from 70,000 to an hourly rate

Suppose you want to keep 70,000 a year, expect 8,000 of business expenses, estimate a combined tax rate of 25%, and have 1,100 billable hours. The calculator’s method is to gross up the income and expenses together by dividing by (1 − tax rate), then divide by billable hours.

1. Money the business must generate after tax: 70,000 + 8,000 = 78,000.
2. Revenue needed before tax: 78,000 ÷ (1 − 0.25) = 78,000 ÷ 0.75 = 104,000.
3. Check the tax: 104,000 × 0.25 = 26,000. Revenue minus tax minus expenses is 104,000 − 26,000 − 8,000 = 70,000, which is the target.
4. Hourly rate: 104,000 ÷ 1,100 = 94.55 an hour. Rounded up to the nearest 5, which is the sensible way to quote, that is 95.
5. Day rate at 8 hours: 8 × 94.55 = 756.36, so quote 760 or a clean 800.

Adding the 10% buffer lifts revenue to 114,400 and the rate to 104.00 an hour. Either way the rate is about three times the 33.65 that salary ÷ 2,080 suggested, and none of it is padding. The calculator’s sanity check makes the same point from the other side: an employee paid 94.55 an hour for 2,080 hours would gross 196,654, but you only bill 1,100 of your 1,840 working hours, so the same rate brings in 104,000. Note that grossing up the expenses along with the income is slightly conservative, since in most tax systems expenses are deducted before tax is charged; treat the small difference as part of your buffer.

Day rates and project prices

A day rate is simply the hourly rate multiplied by 8; the calculator shows it beside the hourly figure because agencies and contract marketplaces almost always ask for one. Day rates are easier to quote, stop clients questioning every fifteen minutes, and suit longer engagements. Hourly rates suit support work and small tasks.

For a fixed project price, estimate the hours honestly, multiply by your hourly rate and add a contingency of 15% to 25% for scope that grows and revisions that were not mentioned. A fixed price moves the risk of overrunning from the client to you, so the contingency is not optional. Whichever format you use, the annual arithmetic is unchanged: what you invoice across the year, divided by the hours you actually bill, has to clear the rate the calculator gives you.

Comparing a freelance rate with a salaried offer

To weigh a contract against a job, convert both to the same footing. The salary to hourly calculator turns an annual salary into an hourly figure on whatever weekly hours and paid weeks apply, so a 65,000 offer on a 40-hour week is 31.25 an hour gross. Do not compare that directly with a freelance rate. Instead, run the freelance rate through the annual maths: 90 an hour × 1,100 billable hours is 99,000 of revenue; take off 25% tax and 8,000 of expenses and you keep 66,250. Set that against the salary after the same kind of tax, then add the value of the employer’s pension contribution, paid holiday, sick pay and any health cover, which together often add 20% to 30% to a salary’s real worth. Both calculators work in gross figures, so apply the same tax assumptions on both sides before you decide.

Quick checklist

• Set the rate from the income you want to keep, not from your last salary.
• Count only billable hours, and be pessimistic: 1,000 to 1,200 a year is normal.
• Include expenses, both halves of social contributions and the benefits you now fund yourself.
• Add a buffer of around 10% for slow months and late payers.
• Round up to a clean number for quoting; the day rate is 8 × the hourly rate.
• Revisit the figure whenever your expenses, tax position or working pattern changes.