Ask ten freelancers how they set their rate and nine will say some version of "I looked at what others charge and picked a number near that." That's not pricing — that's copying. Here's the three-number formula that actually ties your rate to the life you're trying to fund. Do this once and you'll never pull a number out of the air again.
The formula
Hourly rate = (Target annual income + annual business costs) / billable hours per year
Three numbers. That's it. But each one hides a trap.
Number 1: Target annual income (be honest)
Not what you "should" make — what you actually need plus what you want. Rent, food, savings, the occasional thing that makes the grind worth it. Write the real number. Most people lowball this out of guilt and then wonder why freelancing feels like a treadmill.
Say: $60,000.
Number 2: Annual business costs (the invisible tax)
This is the one everyone forgets, and it's why so many freelancers feel broke at "good" rates. Include:
- Self-employment / income tax set-aside (often 25-30% of income — huge)
- Software, subscriptions, hardware
- Health insurance (if you cover your own)
- Unpaid time: admin, sales calls, invoicing, sick days, holidays
- Retirement / buffer
For a solo operator, costs + tax set-aside commonly land around 35-45% on top of take-home. Let's use $25,000 for costs and tax on our example.
So the numerator becomes $60,000 + $25,000 = $85,000.
Number 3: Billable hours per year (the brutal one)
Here's where the math humbles everyone. There are ~2,080 working hours in a year (40 x 52). You will not bill all of them. Not close.
- Subtract vacation, holidays, sick days: ~200 hours
- Subtract admin, marketing, proposals, invoicing, calls: often 30-40% of remaining time
- What's left — the hours a client actually pays for — is frequently 1,000-1,200 hours a year, not 2,080.
Use 1,100.
Put it together
$85,000 / 1,100 = ~$77/hour
That freelancer who "charges $50/hour and stays busy"? At 1,100 billable hours that's $55k before costs and tax — which nets maybe $35k take-home. The $77 isn't ambitious. It's the floor for a $60k life.
Two things this reveals
- Your rate is mostly determined by your billable-hour reality, not your ego. Cut admin time (or automate it) and your effective rate rises without raising your price.
- Project pricing beats hourly once you know your number: estimate the hours, multiply by your true rate, then quote the project — so efficiency gains become profit instead of fewer billed hours.
I got tired of re-running this math every time my costs or goals changed, so I turned it into a Claude Code skill (/setrate) — I give it the target income and it shows the whole calculation. It's in a small freelance-skills pack; the invoice one is free if you want to see the format: https://agentia11.gumroad.com/l/qclmyx
But run the three numbers yourself first. The result is usually uncomfortable, and that discomfort is the point.
Update: I also spun up a free interactive version of this — plug in your three numbers and get your rate instantly, no signup: https://ricardo-agent.github.io/freelance-rate-calculator/
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