Your freelance rate = (take-home goal + business expenses) ÷ (1 − your tax rate) ÷ billable hours. Four numbers, each one doing real work. The Freelancer Hourly Rate Calculator runs this formula with your figures; this guide explains each input, because the rate is only as honest as the numbers fed into it.
Step 1: Name the income you want to keep
Start at the end: how much should be left for you after business expenses and taxes — the amount that pays your rent, groceries, and savings. Be careful with the obvious shortcut. Your old salary is not this number: an employee on $75,000 doesn't keep $75,000 either (payroll taxes and income tax come out first), and as a freelancer you're additionally replacing the benefits and employer tax contributions that salary quietly included. If you're weighing an actual contract offer against a job, the 1099 vs W-2 Calculator prices that benefits gap properly. For rate-setting, just pick the keep-number your life actually requires.
Step 2: Add your business expenses
Software, insurance, equipment, phone, coworking, professional fees, the tax software itself — list what the business spends in a year to keep you working. Every expense dollar must be earned before it can be spent, so it goes on top of your keep-number. New freelancers chronically undercount here; if you're unsure, $4,000–$8,000 a year is a realistic band for a laptop-based solo practice. The cleanest way to get this number right is to pull up last year's bank and card statements and tag everything the business paid for — most people find a subscription or two they'd forgotten entirely, and every found dollar is a dollar your rate no longer has to cover twice.
Step 3: Gross up for taxes
Taxes are a percentage of everything you earn, so you can't just add them — you divide. If your planning tax rate is 25%, then to keep $81,000 after tax you must bill $81,000 ÷ (1 − 0.25) = $108,000. Use a planning rate of 25–30% until you have a real one; self-employment tax alone runs higher than most new freelancers expect, and the Quarterly Estimated Tax Calculator will turn your eventual annual figure into the four payments that keep you out of penalty trouble.
Step 4: Count only the hours you can bill
A 40-hour week is not 40 billable hours. Start with the year: 52 weeks minus vacation, holidays, and sick time — say 47 working weeks, or 1,880 hours. Then apply utilization: the share of working time a client actually pays for. Admin, marketing, proposals that go nowhere, invoicing, and gaps between projects eat the rest. Solo freelancers typically bill 60–80% of working time. At 75%, that's 1,410 billable hours — and every point of utilization moves your required rate a lot, as the example shows.
Worked example — a $75,000 take-home goal
Jordan wants to keep $75,000 in a year, after taxes and business costs:
- Business expenses: $6,000/year → amount to cover: $75,000 + $6,000 = $81,000
- Grossed up for a 25% tax planning rate: $81,000 ÷ 0.75 = $108,000 of revenue needed
- Working time: 47 weeks × 40 hours = 1,880 hours
- Billable at 75% utilization: 1,880 × 0.75 = 1,410 hours
- Required rate: $108,000 ÷ 1,410 = $76.60 per hour — in practice, quote $77–$80.
Check the answer backwards: 1,410 hours × $76.60 = $108,006 billed; after 25% tax, $81,004.50; after $6,000 of expenses, $75,004.50 kept. The formula closes.
Now the trap Jordan avoided: a $75,000 salary converts to $36.06 an hour ($75,000 ÷ 2,080). Billing 1,410 hours at $36.06 grosses just $50,841 — after the same tax and expenses, only about $32,131 kept, a $42,869 shortfall. And sensitivity matters as much as the headline: at 60% utilization the required rate jumps to $95.74; at 80% it relaxes to $71.81.
Then check the rate against the real world
The formula gives you the rate you need, not the rate the market will pay — hold both thoughts. If clients balk at the number, the honest levers are the inputs, not wishful thinking: raise utilization (productize admin, batch marketing), cut expenses, specialize so the market rate rises, or accept that the keep-number requires a different mix of clients. What doesn't work is quoting the salary-divided-by-2,080 number and hoping volume fixes it — the example above is that hope, quantified. Re-run the math whenever an input changes materially: a big new expense, a tax-rate surprise at filing time, or a utilization drift across a quarter. A rate is a hypothesis about your year; review it like one.
Estimates only — not financial or tax advice. This guide teaches a rate-setting method with a simplified tax planning rate; your actual tax depends on your profit, state, filing status, and deductions, and your market rate depends on your field and clients. Use the linked calculators with your real figures, and confirm tax questions at irs.gov or with a tax professional.