How to Calculate Your Freelance Rate — Step by Step

The formula, in one paragraph

Your freelance rate is the rate that replaces your target salary, pays for the business, and leaves a profit — over the hours you can actually bill. The billable hours are the hours a week you can charge a client for, times the weeks a year you work. Divide the target salary by those hours for the base rate. Add the business expenses and divide again for the cost rate. Then add the profit margin, and you have the rate. The day rate is the hourly rate times 8, the weekly income is the rate times the billable hours a week, and the monthly income is the weekly income times 52 divided by 12.

Step 1: Work out your billable hours

Multiply the hours a week you can bill by the weeks a year you work. At the example numbers the hours are 30 a week and the weeks are 48, so the billable hours are 30 times 48, which is 1,440 hours a year. Billable hours are the hours a client pays for — not the hours you work. Admin, marketing and quoting are real work, but nobody pays you for them.

Step 2: Work out the base rate

Divide your target salary by the billable hours. At the example numbers the salary is $80,000 and the billable hours are 1,440, so the base rate is $80,000 divided by 1,440, which is $55.56 an hour. The base rate is what the salary alone is worth, hour by hour.

Step 3: Work out the cost rate

Add the business expenses to the salary, then divide by the billable hours. At the example numbers the expenses are $5,000, so the cost rate is ($80,000 + $5,000) divided by 1,440, which is $59.03 an hour. The cost rate is the rate that keeps the business running and pays you the target salary.

Step 4: Add the profit margin

Multiply the cost rate by one plus the margin. At the example numbers the margin is 20 percent, so the hourly rate is $59.03 times 1.20, which is $70.83 an hour.

Step 5: Work out the day rate, weekly and monthly pay

The day rate is the hourly rate times 8: $70.83 times 8 is $566.67. The weekly income is the hourly rate times the billable hours a week: $70.83 times 30 is $2,125.00. The monthly income is the weekly income times 52 divided by 12: $2,125.00 times 52 divided by 12 is $9,208.33. The annual revenue is $70.83 times 1,440, which is $102,000.00. The profit is $85,000 times 20 percent, which is $17,000.00.

The same arithmetic at other salaries

The same steps scale to any salary. On a $60,000 salary the rate is $54.17, weekly $1,625.00, monthly $7,041.67, annual $78,000.00 and profit $13,000.00. On a $100,000 salary the rate is $87.50, weekly $2,625.00, monthly $11,375.00, annual $126,000.00 and profit $21,000.00.

Why more hours do not mean more money

Changing the billable hours moves the rate, not the pay. At 40 billable hours a week the rate falls to $53.13, but the weekly income stays $2,125.00 and the monthly income stays $9,208.33. At 20 hours a week the rate rises to $106.25, and the weekly income is still $2,125.00. The hours only change how the same annual target is split across hours — more hours mean a lower rate, not more money.

Working backwards from a target rate

The calculation also runs backwards. If you want a $100.00 an hour rate at 30 hours a week, 48 weeks a year, $5,000 of expenses and a 20 percent margin, the salary it replaces is $100 times 1,440 divided by 1.20, minus $5,000 — which is $115,000.00. If you want a $50.00 rate, the billable hours you need are 42.50 a week — more than a full working week of billable time, which is why a $50 rate does not replace an $80,000 salary. If you want an $80.00 rate, the margin you need is 35.53 percent (exact 35.5294 percent).

What NOT to do

Do not divide your salary by 2,000 hours. A salaried year is 2,080 hours, but nobody bills all of them — and dividing by 2,000 gives $40.00 an hour here, which is $30.83 short of the $70.83 the arithmetic actually needs. Do not forget the expenses: leaving out $5,000 drops the rate to $66.67, and the business still has to be paid for.

That box is the whole formula.