How to Calculate Your Hourly Rate (Formula + Calculator)

To calculate your hourly rate, add the income you want to earn in a year to your yearly business costs and the tax you'll owe, then divide that total by the hours you can actually bill in a year. The result is the minimum you need to charge. Everything else is about getting those four numbers right.

The hard part is being honest about billable hours, because that's where most rates go wrong.

Below you'll find the formula, how to work out your real billable hours, a fully worked example, how to check your number against the market and when to raise it. If you'd rather skip the math, our free hourly rate calculator does it for you.

How to calculate your hourly rate: the formula

Here's the formula in one line:

Hourly rate = (income goal + business costs + taxes) ÷ billable hours per year

Each part has a job:

• Income goal: what you want to pay yourself in a year. Think of it as your salary.
• Business costs: everything the business spends to keep running, from software to insurance.
• Taxes: what you'll owe on your earnings, so your income goal isn't eaten by the tax bill.
• Billable hours: the hours you can invoice a client for, after admin, sales, holidays and sick days.

The top line is what the business needs to bring in; the bottom line is the hours you have to bring it in.

Step 1: Set your income goal

Start with what you need, then what you want.

1. Add up your personal yearly costs: rent or mortgage, food, transport, debt payments, savings.
2. Add what you want on top: retirement contributions, travel, a buffer for slow months.
3. If you're leaving a job, compare the total with your old salary. Your goal should be at least that, because you're now paying for things your employer used to cover.

Write it down as a yearly figure, so slow months and holidays are counted.

Step 2: Add up your business costs

New freelancers often forget these, because employers used to pay them. Go through recent bank statements and list everything the business pays for.

Common costs for a freelancer or small consultancy:

• Software: design tools, accounting, time tracking, cloud storage, email.
• Equipment: a laptop, monitor and phone, spread over the years they last.
• Insurance: health cover (if you no longer have it through an employer), professional liability, equipment.
• Professional help: an accountant or bookkeeper, legal review of contracts.
• Workspace: coworking, a share of home costs, internet.
• Marketing: website hosting, a domain, portfolio sites, travel to meet clients.
• Training: courses, books, conferences.

If you're unsure of a cost, estimate high.

Step 3: Account for taxes

Your rate has to cover the tax on your earnings, or your income goal shrinks every April.

How much depends entirely on where you live and how your business is set up. In the US, for example, self-employed people pay self-employment tax of 15.3% for Social Security and Medicare on top of income tax, because there's no employer paying half.

The simplest approach: ask an accountant to estimate your yearly tax at your income goal, and add that figure to the top line. If you can't do that yet, use last year's tax bill as a starting point.

This is general information, not tax advice. Tax rules vary by country and state, so check with an accountant for your situation.

Step 4: Work out your realistic billable hours

This is the step that matters most, and the one people get wrong.

A full-time job is often counted as 2,080 hours a year: 40 hours a week for 52 weeks. You won't bill anywhere near that.

Start with your working days

Begin with 260 weekdays in a year (52 weeks × 5 days) and take away the days you won't work:

That leaves 220 working days. At 8 hours a day, that's 1,760 working hours.

Then take out non-billable time

Not every working hour is billable. Some of your week goes to work no client pays for directly:

• answering emails and scheduling calls;
• writing proposals and chasing leads;
• invoicing, bookkeeping and chasing payments;
• updating your portfolio and website;
• learning new tools.

How much time this takes varies a lot by person and by how established you are. The only reliable way to know is to track it. Run a time tracker on everything for two or three weeks, mark each entry billable or not, and look at the split. Our complete guide to billable hours explains how to work out that split, called your utilization rate.

If you're just starting and have no data yet, plan conservatively. In the example below we assume 60% of working hours are billable, which is about 24 billable hours a week.

See how much billable hours change the rate

Billable hours have a bigger effect on your rate than anything else. Here's the same yearly total of $96,400 (from the example below) divided by different weekly billable hours, over 44 working weeks:

Overestimate your billable hours by ten a week and you undercharge by a third. That's why tracked hours beat guesses.

A fully worked example

Let's put it together. Maya is a freelance brand designer in the US. These are her numbers (the tax figure is an assumption for the example):

Her billable hours:

• 220 working days × 8 hours = 1,760 working hours.
• 60% billable = 1,056 billable hours a year (24 a week over 44 weeks).

Her minimum rate:

$96,400 ÷ 1,056 hours = $91.29 an hour

Add a margin for profit

$91.29 is a floor: it covers her salary, costs and taxes, with nothing left over. A business also needs a margin, for a slow quarter, a client who pays late or the next laptop.

With a 10% margin on top, Maya's rate becomes about $100 an hour. A round number is also easier to quote and remember.

Compare it with a salary

If Maya divided her $65,000 income goal by 2,080 hours, she'd get $31.25 an hour. That's less than a third of the rate she actually needs.

The gap is costs, taxes and unbillable hours, which an employer would normally cover.

Run it in the calculator

Our free hourly rate calculator asks for four numbers. For Maya:

• Income you want in a year: $83,000 (her $65,000 plus $18,000 for taxes, so the rate covers tax too);
• Business costs in a year: $13,400;
• Billable hours per week: 24;
• Weeks off per year: 8.

It gives the same $91.29.

Check your rate against the market

Your formula tells you what you need. The market tells you what clients will pay. You want both to line up.

Ways to check:

• Employee pay for your role. The US Bureau of Labor Statistics publishes wage estimates for hundreds of occupations through its Occupational Employment and Wage Statistics program. Employee wages don't include the costs and unbillable time you carry, so a freelance rate should sit well above them.
• Peers. Ask freelancers in your field what they charge. Many share rates openly in communities and newsletters.
• Agencies. Agencies that publish day rates or project prices give you a ceiling for similar work.
• Your own wins and losses. If every proposal is accepted without a question, you're probably too cheap. If none are, look at your pricing and your positioning.

If the market rate is well below what you need, you have three levers: lower your costs, bill more hours (by cutting admin), or move to a niche or client type that pays more. Dropping your rate below your floor isn't one of them, because you'd be paying to work.

When to raise your rates

Review your rate at least once a year. Raise it when:

• You're fully booked and turning work away.
• Clients agree instantly with no negotiation.
• Your costs have gone up, from insurance, software or inflation.
• You've added skills or results you can point to, like a case study or certification.
• Your tracked hours show less billable time than you planned, so the old rate no longer covers the business.

The easiest place to start is with new clients: quote the new rate in every new proposal. For existing clients, give notice, usually 30 to 60 days, and tie it to a date.

Here's a short email you can adapt:

Subject: Updated rates from March 1
 
Hi Sam,
 
A quick heads-up: from March 1, my hourly rate will be $110, up from $95.
It's my first change in two years and reflects higher costs and the
expanded work we've been doing together.
 
Everything booked before March 1 stays at the current rate. If you'd like
to lock in a block of hours at today's rate before then, just let me know.
 
Thanks for the continued work. I really enjoy this project.
 
Maya

Hourly vs project pricing

Hourly pricing is the clearest way to start: every hour you work is paid, and changes in scope pay for themselves. But it's not the only option:

• Fixed-price projects pay a set fee for a defined result. You earn more if you work efficiently, and lose if the project runs over.
• Retainers pay a set monthly fee for ongoing work or availability, which smooths your income.

Even with fixed prices and retainers, your hourly rate is still the base. You estimate the hours, multiply by your rate and add a margin for risk. Our guide to retainers vs fixed-price projects covers when each model fits.

Whichever you choose, track your time. It's how you find out whether a fixed price was profitable and whether your billable-hours assumption holds. In Tristiks Grow, you save each client's hourly rate, track time against their projects, and see what the hours earned before you invoice them.

Frequently asked questions

How do I calculate my hourly rate from a salary?

Divide the yearly salary by 2,080 (40 hours × 52 weeks) to get the employee equivalent. As a freelancer, don't charge that figure: add your business costs and taxes, and divide by your billable hours instead, which usually gives a rate two to three times higher.

How many billable hours should a freelancer plan for?

Fewer than you work. Admin, sales, invoicing and learning take time no client pays for, so plan on billing well under 40 hours a week. Track every hour for a few weeks and use your real billable share; until then, plan conservatively.

Should I charge every client the same hourly rate?

Not necessarily. Many freelancers charge more for rush work, specialist skills or large companies, and keep older clients on their original rate for a while. Just make sure no rate falls below the floor your formula gives you.

Does my hourly rate include taxes?

It should. Add your estimated yearly tax to the top line of the formula, or enter your income goal before tax in the calculator. Check the estimate with an accountant, since tax depends on where you live.

What hourly rate should a beginner freelancer charge?

Start with the formula, not with what you think a beginner "should" charge. If the result is above what clients in your market pay, build a portfolio with a few well-chosen projects, then raise your rate as you get results you can show.

Wrap up

Your hourly rate comes down to four numbers: what you want to earn, what the business costs, what you'll owe in tax and how many hours you can really bill. Get the last one from tracked time, not hope, and add a margin for profit.

Plug your numbers into our free hourly rate calculator to find your minimum rate in under a minute.