Why Most Freelancers Underprice Themselves

New freelancers often set their rate by dividing a target salary by 2,080 work hours (52 weeks × 40 hours) — the same way a W-2 salary converts to hourly. That number is almost always too low, because it ignores three things employees never have to think about: self-employment tax, business expenses, and the simple fact that not every hour you work is billable.

The Formula

This works backward from the number that actually matters — what lands in your pocket — through taxes and expenses, then divides by the hours you can realistically bill, not the hours you work.

How to Use This Calculator

Start with your desired take-home pay — what you want to actually keep after tax and after covering business costs. Add your annual business expenses and a tax set-aside percentage (25–30% covers most freelancers' combined self-employment and income tax). Then enter your real working pattern: weeks off, hours per week, and — critically — your billable utilization rate.

Why Billable Utilization Is the Number Most People Get Wrong

Working 40 hours a week doesn't mean billing 40 hours a week. Time spent on proposals, invoicing, marketing, client calls that don't lead to paid work, admin, and skill-building all eat into your week without generating revenue. A realistic billable utilization for most solo freelancers and consultants is 50–70% — meaning out of a 40-hour week, only 20–28 hours are actually billable.

The Self-Employment Tax Gap

A $100,000 freelance income is not the same as a $100,000 salary. Employees split FICA tax with their employer (7.65% each); freelancers pay both halves themselves — 15.3% in self-employment tax — on top of regular income tax. That's why this calculator's tax set-aside defaults to 30%, not a typical employee withholding rate of 15–20%.

Worked Example

Wanting to take home $80,000/year, with $6,000 in expenses and a 30% tax set-aside: net profit needed is about $114,286, plus $6,000 in expenses brings gross revenue needed to roughly $120,286. Taking 4 weeks off, working 40 hours/week at 60% billable utilization gives 1,152 billable hours/year — landing on an hourly rate of about $104/hour.

Adjusting the Rate to Reality

• Rate too high for your market? Consider whether your billable utilization assumption is too conservative, or whether expenses can be trimmed
• Want to charge less but keep the same income? Increasing billable hours (more clients, better scheduling) or extending your work year are the two real levers
• Comparing to salaried roles? Remember a freelance rate needs to cover benefits (health insurance, retirement, paid leave) that a salary often includes separately

Where This Fits Your Bigger Picture

Once you know your target gross revenue, plan your tax payments with our quarterly estimated tax calculator, and track your actual margins with our profit margin calculator as real income comes in.

Frequently Asked Questions