Most freelancers set their rate by looking at what others charge, then adjust it until the number feels survivable. That approach has two problems: the market rate tells you nothing about your costs, and a rate that covers your costs may still leave nothing for the weeks you do not work.
The method below works from the other direction. Start with the income you need, add the costs of running the business, allow for the work that never gets billed, and divide by the hours you can actually sell.
Income and billable hours
The rate comes from two figures: what you need to earn, and how many hours you can actually sell.
Start with income, not with the market
Decide what you need to take out of the business in a year. Not what you would like, and not what a salary comparison site says — what covers your rent, bills, tax, savings and the occasional holiday.
Then decide what the business needs to keep: equipment replacement, software, insurance, training, pension contributions, and a buffer for quiet months.
Add the two together. That total is the revenue you must generate, before any allowance for the work you do that nobody pays for.
Billable hours versus working hours
A working week is not a billable week. Quoting, invoicing, chasing payment, marketing, learning, admin and travel all consume hours that no client pays for.
A common pattern for a solo freelancer is 25 billable hours in a 40-hour week. The other 15 go on running the business, and pretending otherwise produces a rate that quietly fails.
Then account for the year. Nobody bills 52 weeks. Holidays, sickness, public holidays and quiet periods typically leave 46 working weeks, and many freelancers plan on 44 or 45 to be safe.
Billable hours per year = billable hours per week × working weeks per year.
At 25 hours and 46 weeks, that is 1,150 billable hours.
Adding business expenses
Two kinds of cost matter, and they enter the calculation differently.
Direct costs are tied to a specific job: subcontractors, materials, software licences bought for a client, travel to their site. These can be charged on to the client or built into the rate; either way, they must not be paid for out of your profit.
Overheads are the costs of being in business at all: insurance, accounting, equipment, software subscriptions, professional memberships, marketing. These have to be recovered from the rate whether or not any single job covers them.
Worked example: 55,000 target, 1,150 billable hours
A freelancer wants 55,000 of personal income. Business expenses are 9,000 a year. They want a 10 per cent contingency for quiet months and cost increases.
Required revenue = (income + expenses) × (1 + contingency).
(55,000 + 9,000) = 64,000. With 10 per cent: 64,000 × 1.10 = 70,400.
Hourly rate = required revenue / billable hours = 70,400 / 1,150 = 61.22.
That is the floor, not the target. It assumes every one of the 1,150 hours is sold at that rate, with no gaps. In practice a freelancer quoting at exactly 61.22 will undershoot, because a proportion of quoted work never converts.
The same figure as a day rate: 61.22 × 8 = 489.76, or about 490 for a full day. Many freelancers set the day rate slightly above hours × rate, because a day sold is a day that cannot be sold twice.
Checking the rate against the market
Once you have your number, compare it with what clients in your market actually pay. If your floor is well above the going rate, the problem is usually one of three things: costs that are too high for the market, a service that is too broad, or a target income that the chosen market cannot support at that volume.
If your floor is well below the going rate, do not simply charge the higher figure without understanding why. The gap may reflect experience, specialism or risk that you have not yet priced in — or it may reflect a market segment that expects something you are not delivering.
Test the rate on a real proposal. Two or three live quotes at the new number will tell you more than another spreadsheet.
Common mistakes
- Assuming 40 billable hours a week. It is not achievable for a solo business and produces a rate that fails on contact with a real month.
- Forgetting tax and pension. Income tax, self-employment contributions and pension saving come out of the 55,000, not out of the business expenses.
- Leaving out the contingency. One quiet quarter without a buffer turns a good year into a cash-flow problem.
- Charging expenses as profit. Passing costs through at cost is fine; absorbing them into the rate without counting them is not.
- Setting the rate once a year. Costs and billable capacity move; revisit both annually and after any large client loss.
- Discounting the hourly rate instead of the scope. A lower rate on the same work is a permanent pay cut; a smaller scope is a decision.
Setting and testing the number
Run your own income, expenses and capacity through the freelance rate calculator to get the hourly figure, then check what it means for a month with the profit calculator. When the rate is settled, put it into a quotation that states the hours included, so the number is attached to a defined scope rather than an open-ended commitment.
General information: this guide explains common business calculations. It is not accounting, tax or legal advice, and rules vary by country. Confirm decisions with a qualified professional.