Many freelancers set their hourly rate too low because they compare it with a normal employee salary.
That is a mistake.
A freelancer does not bill every working hour. They also need to pay for taxes, software, insurance, unpaid admin work, sales calls, learning time, sick days, and slow months.
If you only divide your target income by 40 hours per week, your rate will almost always be too low.
The common mistake
A simple but misleading calculation looks like this:
Target annual income / working hours = hourly rate
For example:
$80,000 / 2,000 hours = $40 per hour
At first, $40 per hour may look enough.
But this assumes every working hour is paid. In real freelance work, that is rarely true.
Billable hours are not the same as working hours
A freelancer may work 40 hours per week, but only part of that time is billable.
Non-billable work can include:
- finding clients
- writing proposals
- discovery calls
- project management
- bookkeeping
- revisions
- learning new skills
- marketing
- email communication
- unpaid support
If only 60% of your working time is billable, then 40 working hours becomes only 24 billable hours.
That changes the calculation completely.
A better formula
A more realistic freelance hourly rate formula is:
Required annual revenue / annual billable hours = hourly rate
Required annual revenue should include:
- target take-home income
- business expenses
- software subscriptions
- insurance or benefits
- retirement savings
- tax reserve
- risk buffer
Annual billable hours should include:
- working weeks per year
- working hours per week
- billable utilization percentage
Example
Assume this situation:
Target take-home income: $80,000
Business expenses: $8,000
Insurance / benefits: $6,000
Retirement savings: $5,000
Tax reserve: 25%
Risk buffer: 10%
Working weeks per year: 46
Working hours per week: 40
Billable utilization: 60%
Before taxes and buffer, the freelancer needs to cover:
$80,000 + $8,000 + $6,000 + $5,000 = $99,000
After adding a 10% risk buffer:
$99,000 x 1.10 = $108,900
If 25% is reserved for tax, the required revenue is higher:
$108,900 / 0.75 = $145,200
Now calculate annual billable hours:
46 weeks x 40 hours x 60% = 1,104 billable hours
Hourly rate:
$145,200 / 1,104 = $131.52 per hour
This is very different from the simple $40 per hour calculation.
Why this matters
Undercharging creates several problems.
You may need to take too many clients. You may not have enough time for quality work. You may struggle to pay taxes. You may not have room for slow months. You may also find it hard to invest in better tools, learning, or marketing.
A sustainable freelance rate should protect both your income and your ability to deliver good work.
A quick way to check
You can calculate this manually in a spreadsheet, or use a browser-based freelance hourly rate calculator such as:
https://liaopengdong.github.io/business-tools/calculators/freelance-hourly-rate/
The important part is not the exact tool. The important part is making sure your rate includes taxes, expenses, benefits, savings, risk buffer, and non-billable time.
Final checklist
Before setting your freelance rate, check:
- target take-home income
- business expenses
- software costs
- insurance or benefits
- retirement or savings goal
- tax reserve
- working weeks per year
- working hours per week
- billable utilization
- risk buffer
If your rate only covers the hours you work, it may not cover the business you are running.
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