How to Set a Freelance Rate That Actually Pays You

Count the hours you can actually bill

2,080 is 52 weeks of 40 hours. Start by taking out holidays, vacation and sick days. Four weeks off leaves 48 working weeks, or 1,920 hours.

Then take out the hours that are work but not billable: finding clients, writing proposals, invoicing, bookkeeping, learning, and the gaps between one project ending and the next starting. For many freelancers these add up to a large share of the week. At 60% billable, 1,920 working hours become 1,152 hours you can charge for.

Track your own split for a few months to replace that assumption with a real number. It's usually lower than people guess.

Add the costs a job used to cover

An employer pays for things that don't appear on a salary: health insurance, retirement contributions, paid time off, a laptop, software, and a share of the payroll taxes. As a freelancer, all of it is yours.

In the US, an employer pays half of Social Security and Medicare on your wages, 7.65% of pay in total, and self-employed people pay both halves through self-employment tax. On $80,000, the employer's half would have been about $6,100. Tax rules and rates change, so check the current figures with a tax professional.

Add the costs of running the business itself: equipment, software subscriptions, insurance, an accountant, a website, professional memberships.

The rate, worked through

Start from the $80,000 you want to earn. Add $15,000 for the insurance and retirement contributions a job would have provided, $8,000 of business costs, and $6,100 for the employer's half of payroll taxes. That's $109,100 a year the work has to bring in.

Divide by 1,152 billable hours and the rate is about $95 an hour, roughly two and a half times the naive $38.

Add a margin for the months when work is thin, a client pays late or a project gets canceled. Ten percent takes the rate to around $105. It's also sensible to keep cash reserves of a few months' expenses, since freelance income arrives unevenly even when the yearly total is right.

Then check it against the market

The formula tells you what you need. The market tells you what clients will pay. If the two are far apart, the gap doesn't disappear by charging less. You can raise what the work is worth by specializing, cut costs, or find ways to bill a larger share of your hours.

A rate that doesn't cover the real costs is a hidden subsidy to your clients, paid out of your savings and your future. Many freelancers only discover it at tax time.

Get paid on time

A good rate is worth little if clients pay months late. Many freelancers ask for part of a project fee before starting, invoice the day work is delivered, and set short payment terms in writing.

Put late fees and a stop-work clause in the contract, where they're lawful, and use them. A client who's allowed to fall two invoices behind while work continues has turned your business into their line of credit.

Pricing by the project

Hourly billing punishes getting faster: the better you are, the less you earn for the same result. Pricing by the project, or by the value of the result to the client, fixes that, and many experienced freelancers move to it.

To price a project, estimate the hours, add a buffer for the revisions and calls that always arrive, multiply by your rate, and write down what's included. Scope that isn't written down tends to grow, and each extra round of changes quietly lowers your real hourly rate.

Raise rates for new clients first, and give existing clients notice before raising theirs. Doing it a little every year is easier on everyone than a large jump after several years of flat prices.

Key takeaways

• Dividing a salary by 2,080 hours ignores unbillable time and the costs a job used to cover.
• Billable hours are usually far fewer than working hours once time off, sales and admin come out.
• Add benefits, business costs and the employer's share of payroll taxes before dividing by billable hours.
• In the worked example, replacing an $80,000 salary takes about $95 to $105 an hour, against the naive $38.

Frequently asked questions

How many billable hours does a freelancer have in a year?

It varies with the kind of work and how much time goes to finding clients and running the business. Many freelancers bill well under the 2,080 hours in a standard working year. Tracking your own time for a few months gives you the real figure to plan around.

Should I charge hourly or per project?

Hourly suits work whose scope is genuinely unknown. Project pricing suits work you can define in advance, and it rewards you for being efficient. Many freelancers use hourly rates to estimate projects and then quote a fixed price.

How much should a freelancer set aside for taxes?

It depends on your income, location and deductions. Setting aside a fixed share of every payment in a separate account, and paying estimated taxes on schedule, avoids a painful bill at the end of the year. A tax professional can suggest the right share for your situation.