Dividing the salary you want by the hours in a year gives rates that are too low. Here is the full formula.
Key findings
- Rate = required revenue ÷ billable hours.
- To earn 35,000 net with 5,000 of expenses and 30% for tax, you need to bill 55,000.
- With 35% non-billable time, the rate comes out at about 46 an hour.
The most common mistake
Dividing the salary you would like by the hours in a working year. That produces rates that are too low, because it forgets three things: your business expenses, the taxes and contributions you pay yourself, and all the hours you work without being able to bill anyone.
The formula
- Required revenue = the net income you want ÷ (1 − tax percentage) + business expenses.
- Billable hours = working weeks × hours per week × (1 − non-billable time).
- Hourly rate = required revenue ÷ billable hours.
An example
You want to earn 35,000 net a year, your business has 5,000 of expenses and you set aside 30% for tax and contributions. You need to bill 55,000. If you work 46 weeks of 40 hours and 35% of your time goes on finding clients, quotes, invoicing and training, you have 1,196 billable hours. Your rate should be about 46 an hour, or 368 for an 8-hour day.
The time nobody sees
It is the most underestimated figure. Finding clients, preparing proposals, bookkeeping, training, email… For many freelancers it is a third of their time or more. Look back at a month of your calendar and measure it for yourself.
Beyond the hourly rate
- Project pricing: estimate the hours, apply your rate and add a margin for the unexpected.
- Look at the market: your minimum rate is the one that covers your numbers; what you can charge depends on your experience and the value you bring.
- Review it every year with your real expenses and hours.
The tax and contributions percentage depends on your country and income: ask your accountant for an estimate. Work out your rate with the freelance hourly rate calculator.