How to Set Your Freelance Hourly Rate

New freelancers almost always undercharge, and they undercharge in exactly the same way: they take their old salary, divide it by 2,080 hours, and call that their rate. That number ignores three costs that employees never see — taxes, business expenses, and the hours you work but cannot bill. The result is a rate that looks fine on paper and leaves you short at the end of the month.

This guide gives you a formula that covers all three, then works through a complete example.

The formula

Start with what you want to earn, add your business expenses, gross it up for taxes, and divide by the hours you can actually bill:

Each piece matters. Target income is what you want to keep, comparable to a salary. Expenses include software, equipment, insurance, phone, internet, and anything else the business costs you. Tax rate is the share you must set aside — as a self-employed worker you pay both halves of Social Security and Medicare (15.3% combined) plus income tax, so 25% is a common planning figure, though your real rate depends on your income and state. Billable hours are the hours clients actually pay for, not the hours you sit at your desk.

Worked example: targeting $70,000

Say you want to keep $70,000 a year, your business expenses are $8,000, and you set aside 25% for taxes. First, gross up for tax: ($70,000 + $8,000) ÷ (1 − 0.25) = $78,000 ÷ 0.75 = $104,000 in gross revenue needed.

Now the hours. You plan to work 40 hours a week for 48 weeks (allowing four weeks off), which is 1,920 working hours. At a realistic 60% billable ratio, that is 1,920 × 0.60 = 1,152 billable hours. Divide: $104,000 ÷ 1,152 = $90.28 per hour. Round to a clean number and charge $90 to $95 an hour.

If the number scares you

A rate near $90 can feel impossible if you are used to $33 an hour — but remember, clients are not buying an hour of your life, they are buying a result with no employment costs attached: no payroll taxes, no benefits, no desk, no long-term commitment. If the full rate is hard to sell, do not quietly lower it and absorb the loss. Instead, narrow the scope into a fixed-price package, offer a monthly retainer that smooths your income, or raise rates for new clients first while existing work renews at the higher rate.

Common mistakes to avoid

• Counting all 2,080 hours as billable. Nobody bills every working hour. Use 50 to 70 percent unless your records prove otherwise.
• Forgetting self-employment tax. The 15.3% for Social Security and Medicare comes on top of income tax, and it surprises almost every first-year freelancer.
• Skipping the tax set-aside. Move 25% (or your own rate) of every payment into a separate account the day it arrives. Quarterly estimates are far less painful that way.
• Never raising rates. Your costs rise and your skills improve. Review your rate at least once a year.

Beyond hourly: packages and retainers

An hourly rate is a starting point, not the only way to charge. Once you know your floor — $90 an hour in the example above — you can repackage it. A project you expect to take 10 hours becomes a $900 fixed package: the client gets price certainty, you get paid for the result rather than the clock, and finishing faster raises your effective rate instead of punishing you for efficiency. A retainer works the same way in reverse: a client pays, say, $2,000 a month for up to 20 hours of your time, which smooths your income across slow months and removes the need to constantly find the next project. Both models still rest on the same math — if a package regularly takes far longer than the hours you priced, your real rate has fallen below your floor, and the next package price should rise. Track your hours even on fixed-price work; it is the only way to know whether your packaging is helping or quietly underpaying you.

Frequently asked questions

Educational note: this guide explains the math for learning purposes only and is not financial, tax, or legal advice. Tax rates and rules change, and your own situation may differ — check current rules for your state or talk to a qualified professional before making a money decision.