How to set your hourly rate as a freelancer

Freelancers often set their first rate by asking around, or by dividing their old salary by the hours in a working year. Both leave out the two numbers that matter most: the costs an employer used to pay, and the hours you can’t bill.

You can do better with a page of arithmetic.

Step 1: what you need to earn

Start with the income you want to take home in a year, before tax. Then add what an employer used to cover:

• equipment and software;
• insurance and retirement savings;
• accounting, a workspace, travel;
• paid holidays and sick days, which you now fund yourself.

Say you want $60,000 and your yearly costs come to $12,000. You need to earn $72,000.

Step 2: the hours you can actually bill

Here most estimates go wrong. A year has about 52 weeks. Take out holidays, public holidays and a margin for illness, and say 46 weeks remain. At 40 hours a week that’s 1,840 hours.

You won’t bill all of them. Sales, email, admin, invoicing and learning take time too. Many freelancers find that only 50% to 70% of their working hours are billable. Measure your own ratio; don’t guess it. Track every hour, billable or not, for a month.

Say your ratio is 60%: 1,840 × 0.6 = 1,104 billable hours.

Step 3: divide

$72,000 ÷ 1,104 hours ≈ $65 an hour.

That’s your floor, the rate where the year works out. Round it up, not down.

Step 4: check it against the market

Compare the floor with what clients pay for similar work. If the market pays more, charge more: your floor is a minimum, not a target. If it pays less, you have three levers:

• raise your billable ratio (less admin, fewer unpaid calls);
• lower your costs;
• specialize, so you’re compared with fewer people.

Step 5: measure, then adjust

A rate is a hypothesis. After three months of tracking, you’ll have real numbers: hours worked, hours billed, and earnings per active day. Revisit the rate with those instead of estimates.

In Timelogger Plus, give each client a folder with its hourly rate, and track the non-billable work in a folder of its own. The Dashboard then shows the billable amount and gains per active day for any period, so your next rate review takes minutes.

Checklist

• Target income plus yearly costs.
• Working weeks after holidays and illness.
• Your measured billable ratio.
• Divide, round up, compare with the market.
• Review every quarter with tracked data.