How the hourly rate is calculated
- Billable hours per year = billable hours per week × (52 − weeks off).
- Break-even rate = (target income + annual business costs) ÷ billable hours per year.
- Hourly rate = break-even rate ÷ (1 − profit margin ÷ 100).
- Job price = hours × hourly rate.
Rates are rounded up to the next cent so the result never falls short of your target.
Worked example
A designer wants $80,000 a year before income tax and spends $12,000 a year on software, insurance, equipment and self-employment tax. She bills 25 hours a week and takes 6 weeks off, so she bills 25 × 46 = 1,150 hours a year. Her break-even rate is $92,000 ÷ 1,150 = $80.00. With a 20% profit margin, her rate is $80 ÷ 0.80 = $100 per hour, and a 12-hour job costs $1,200.
Checking the rate against the market
The result is the rate your numbers require, not necessarily what clients in your field pay. If it is well above the going rate, look at the inputs you control: more billable hours, lower costs, or packaging work as fixed-price projects. If it is below, you have room to raise your prices. Put the rate on a quote before the job and bill the hours with the invoice generator afterwards.
Frequently asked questions
How many billable hours per week is realistic?
Many freelancers bill 20 to 30 hours in a 40-hour week. The rest goes to finding clients, quotes, invoicing, email and learning. If you are just starting out, use a lower number until you have a steady flow of work.
Should I include self-employment tax in business costs?
Including it is a sensible approach. A US employee's employer pays half of Social Security and Medicare; as a self-employed person you pay both halves. Adding an estimate to your business costs keeps the target income comparable to a salary.
Why add a profit margin on top of my income?
Your target income pays you; the margin pays the business. It funds slow months, equipment upgrades and late-paying clients without cutting into what you take home. Ten to twenty percent is a common starting range.
Should I show my hourly rate on invoices?
If you bill by the hour, yes: list the hours as the quantity and the rate as the unit price, so the client can check the total. For fixed-price work, you can quote a single amount and keep the rate as an internal check.