Most new freelancers take their old salary, divide by 2,000 hours, and call it a rate. That formula guarantees you earn less than you did as an employee — because it ignores taxes, downtime, and the cost of running the business. Here is the formula that covers everything.
Why salary ÷ 2,000 undercharges you
The naive math looks innocent: $80,000 salary ÷ 2,000 working hours = $40/hour. But that equation pretends three expensive things do not exist:
- Taxes doubled. As an employee, your employer pays half of your Social Security and Medicare taxes. As a freelancer, you pay both halves — the self-employment tax alone is 15.3% on your net earnings.
- Benefits vanished. Health insurance, retirement matching, paid vacation, paid sick days — your employer funded all of it. Now it comes out of your rate.
- Unbillable hours appeared. Marketing, pitching, invoicing, bookkeeping, and chasing late payments are real work that no client pays for directly. Your rate has to carry them.
Add those up and the honest multiplier is roughly 1.5 to 2.5 times your old hourly wage — not 1.0. The formula below shows exactly where each piece comes from.
The four things your rate must cover
Think of your annual income need as four stacked layers:
- Your target take-home pay. The salary-equivalent you want to live on — say $75,000.
- Taxes: add ~25–30%. Self-employment tax (15.3%) plus income tax, minus the deductions you will claim. A safe planning number is 30% of gross set aside for taxes.
- Business costs. Health insurance, software, equipment, coworking, accounting, liability insurance. Total them honestly — most freelancers land between $5,000 and $15,000 a year.
- Profit margin: add 10–20%. You are a business now, not a cost center. The margin funds slow months, retirement savings beyond the basics, and the occasional invoice that never gets paid.
The full formula:
Hourly rate = (target pay + taxes + business costs + profit margin) ÷ billable hours per year
Downtime: why you cannot bill 2,000 hours
The denominator is where most freelancers go wrong. A full-time year is about 2,080 working hours, but you will not bill anywhere near that. Subtract the unpaid reality:
- 4 weeks of vacation and sick time: −160 hours
- Holidays: −80 hours
- Marketing, proposals, and networking: −200 to −300 hours
- Admin, invoicing, and bookkeeping: −100 to −150 hours
- Buffer for slow months and gaps between projects: −100 to −200 hours
A realistic billable year for a solo freelancer is 1,000 to 1,400 hours — roughly 20 to 28 billable hours per week. Use 1,200 as a starting estimate. Every hour in that denominator is precious, which is exactly why the rate per hour has to be higher than the naive math suggests.
Worked example: from a $75,000 salary to an hourly rate
Meet Jordan, a designer leaving a $75,000 job. Here is the full calculation:
- Target pay: $75,000
- Taxes (30% of the running total): the standard shortcut is to gross up — $75,000 ÷ 0.70 = $107,143 needed before taxes. (The 30% set-aside covers self-employment and income tax after deductions.)
- Business costs: health insurance $7,200, software $1,800, equipment fund $2,000, accountant $1,200, misc $1,800 = $14,000
- Running total: $107,143 + $14,000 = $121,143
- Profit margin (15%): $121,143 × 1.15 = $139,314 of required revenue
- Billable hours: 1,200 per year
- Hourly rate: $139,314 ÷ 1,200 = $116/hour
Compare that to the naive $37.50/hour ($75,000 ÷ 2,000). The honest rate is roughly triple. That gap is not greed — it is the taxes, the insurance, the unpaid admin, and the buffer, all made visible. Most freelancers land between $75 and $150 per hour using this method, depending on their costs and how many hours they can realistically bill.
Set the floor, then quote with confidence
Your formula rate is a floor, not a ceiling. Market rates, specialization, and demand all push the real number around — but now you know the number below which you are subsidizing your clients. Three rules for using it:
- Quote projects, not hours, when you can. Estimate the hours, multiply by your rate, add a 15–20% buffer for scope creep, and quote a fixed price. Fixed pricing rewards your speed and removes the client's fear of an open-ended bill.
- Raise rates for new clients first. Existing clients get 30 days' notice and a 5–10% annual increase. New clients get the new rate immediately — no history, no negotiation baggage.
- Track your close rate. If every prospect says yes without blinking, your rate is too low. A healthy close rate is around 30–50%: enough yeses to stay busy, enough nos to prove you are charging what the work is worth.
Frequently asked questions
What is a good freelance hourly rate?
A defensible rate covers your target income plus self-employment tax, business costs, and unbillable time, divided by your actual billable hours. For most freelancers leaving a $75,000 salary, that lands around $75 to $100 per hour — roughly double the salary-equivalent hourly wage.
Why do freelancers charge so much more than employees earn?
Because the hourly rate covers things a salary hides: both halves of payroll tax, health insurance, unpaid time off, marketing, invoicing, and hours spent finding clients. An employee's $40 per hour costs their employer far more than $40 once benefits and overhead are included.
Should I charge hourly or per project?
Use the hourly formula to set your floor, then quote projects as a fixed price based on that rate times your estimated hours plus a buffer. Fixed project pricing rewards your efficiency and protects clients from open-ended bills, but only works if you know your true hourly cost.
How often should I raise my freelance rates?
Review rates at least once a year and raise them for new clients whenever your calendar is consistently full. If every prospect says yes without blinking, your rate is too low. Existing clients typically accept a 5 to 10% annual increase with a month of notice.