Table of Contents
- Why Knowing Your True Hourly Rate Matters
- Step 1: Calculate All Business Expenses
- Step 2: Determine Your Desired Annual Income
- Step 3: Estimate Realistic Billable Hours
- Step 4: Factor in Taxes and Benefits
- Step 5: Use the Final Hourly Rate Formula
- Step 6: Adjust Over Time
1. Why Knowing Your True Hourly Rate Matters
Many freelancers undercharge because they don’t account for hidden expenses and unpaid work. Calculating your true freelance hourly rate ensures you earn enough to cover taxes, overhead, and profit. It also helps you set project rates confidently.
2. Step 1: Calculate All Business Expenses
List every expense tied to your freelance business, both fixed and variable. Examples include:
- Software subscriptions (Notion, Adobe, Zoom)
- Equipment (laptop, camera, desk)
- Marketing costs (website hosting, ads)
- Professional services (accounting, legal)
Tip: Divide annual expenses by 12 to find your monthly overhead, then by the number of billable hours per month.
3. Step 2: Determine Your Desired Annual Income
Decide how much you want to take home each year, considering your cost of living and lifestyle goals. For example, if you want a net income of $60,000, you need to gross more to cover taxes and benefits.
4. Step 3: Estimate Realistic Billable Hours
Freelancers rarely bill 40 hours a week because of admin work, marketing, and downtime. To estimate billable hours:
- Start with 52 weeks/year × 40 hours = 2,080 total hours
- Subtract vacations, holidays, sick days (e.g., 4 weeks = 160 hours)
- Subtract unbillable tasks (marketing, invoicing = ~30% of time)
Example: 2,080 – 160 – 600 = 1,320 billable hours/year.
5. Step 4: Factor in Taxes and Benefits
Include self-employment taxes (typically 15.3% in the US), health insurance, and retirement savings. If your annual income goal is $60,000 and taxes/benefits add 30%, you need to gross $78,000.
6. Step 5: Use the Final Hourly Rate Formula
Now calculate your rate using this formula:
(Annual Desired Income + Annual Expenses) ÷ Billable Hours = True Hourly Rate
Example: ($78,000 + $12,000 expenses) ÷ 1,320 billable hours = $68/hour.
7. Step 6: Adjust Over Time
Your hourly rate should grow as your skills and demand increase. Reassess at least once a year and factor in inflation or new expenses.
FAQ
How often should I recalculate my freelance hourly rate?
At least annually, or when your expenses or income goals change.
Can I use this hourly rate to set project prices?
Yes. Estimate how many hours a project will take and multiply by your true hourly rate.
What if my hourly rate seems too high for my market?
Consider offering packages or value-based pricing, but never undervalue your work.
References and Further Reading
- IRS: Self-Employment Tax
- CNBC: How to Set Your Freelance Rates
- HubSpot: Calculate Your Hourly Rate
- Fiverr Workspace: Hourly Rate Calculator
- Investopedia: Hourly Rate Definition
- FreshBooks: Freelance Rate Calculator
- Forbes: How to Set Your Freelance Rates
Last updated: July 2025
