How to Set Your Freelance Rate

One of the hardest parts of freelancing is figuring out what to charge. Set your rate too low and you'll burn out grinding for pennies. Set it too high and you won't land clients. Most new freelancers make the same mistake: they take their old salary, divide by 2,080 hours (the standard work year), and use that as their hourly rate. That approach leaves a massive amount of money on the table.

Here's the thing most people miss: when you were an employee, your employer was paying far more than just your salary. Benefits, payroll taxes, office space, equipment, and paid time off all cost money that you now have to cover yourself. Your freelance rate needs to account for all of that, or you'll effectively be taking a huge pay cut.

The True Cost of Being Your Own Boss

According to the Bureau of Labor Statistics, the total cost of employee compensation in the private sector averages about 30-40% above wages alone. For every dollar an employer pays in salary, they spend an additional 30-40 cents on benefits and taxes. Here's what that includes:

• Employer payroll taxes (7.65%): Your employer pays half of FICA (Social Security and Medicare). As a freelancer, you pay both halves through the 15.3% self-employment tax.
• Health insurance (8-15% of salary): The average employer contribution for a single employee's health insurance is around $7,000-$8,000 per year. For family coverage, it's closer to $16,000-$17,000. As a freelancer, you're paying the full premium yourself.
• Retirement contributions (3-6% of salary): Many employers offer 401(k) matching, which is essentially free money you lose when you go freelance. You can still contribute to a SEP IRA or solo 401(k), but there's no employer match.
• Paid time off (7-10% of salary): The average employee gets about 15 paid days off per year, plus holidays. That's roughly 4 weeks of compensation for time not worked. As a freelancer, you don't earn when you don't work.
• Other benefits (2-5%): Disability insurance, life insurance, workers' comp, professional development budgets, equipment, software, and other perks add up.

When you tally all of this, you need to charge roughly 40-60% more than a simple salary-to-hourly conversion to maintain the same total compensation. That's the baseline before you even consider profit or business growth.

The Freelance Rate Formula

Here's a step-by-step formula for converting a salary-equivalent to a freelance hourly rate:

1. Start with your target annual income. This is what you want to take home, equivalent to the salary you'd earn as an employee.
2. Add the cost of self-funded benefits. Health insurance premiums, retirement contributions, disability insurance, and any other benefits you need to self-fund. For most people, this adds $10,000-$25,000 per year.
3. Add self-employment tax. Calculate 15.3% of your expected net earnings (technically 92.35% of net earnings times 15.3%).
4. Add business overhead. Software, equipment, coworking space, professional development, marketing, accounting fees, and other operating costs. This varies widely but typically runs $3,000-$15,000 per year for service-based freelancers.
5. Divide by your billable hours. This is the critical part. You won't bill 2,080 hours per year. Between marketing, admin work, professional development, vacation, sick days, and the inevitable slow periods, most freelancers can bill about 1,000-1,400 hours per year. Use 1,200 as a reasonable starting point.

Let's work through a real example:

• Target salary equivalent: $80,000
• Health insurance: $8,000/year
• Retirement savings (10%): $8,000
• Self-employment tax (approx.): $11,300
• Business overhead: $6,000
• Total annual need: $113,300
• Billable hours per year: 1,200
• Hourly rate: $94.42

If you just divided $80,000 by 2,080 hours, you'd get $38.46 per hour. The actual rate needed is nearly 2.5 times higher. This is why the simple division approach doesn't work.

See What Your Salary Equivalent Looks Like

Use the salary calculator below to explore how different salary levels break down. This helps you understand the total compensation value you're trying to replace.

The Billable Hours Problem

The number that makes or breaks your freelance rate calculation is billable hours. New freelancers consistently overestimate how many hours they can bill. Here's a realistic breakdown of a freelancer's year:

• Total weeks in a year: 52
• Vacation weeks: -2
• Sick/personal days: -1
• Holidays: -1.5
• Working weeks: 47.5
• Hours per week: 40
• Total working hours: 1,900
• Time spent on non-billable work (30-40%): -570 to -760
• Actual billable hours: 1,140 to 1,330

That non-billable time includes prospecting for new clients, writing proposals, invoicing and bookkeeping, marketing and social media, administrative work, professional development, and responding to emails. It's real work that's essential to your business but doesn't generate direct revenue.

If you're just starting out, your billable hours might be even lower because you're spending more time finding clients. A first-year freelancer might realistically bill 800-1,000 hours. Plan for that.

Model Your Side Hustle Income After Taxes

Plug your expected freelance income into the side hustle calculator to see what you'll actually keep after self-employment tax and income tax.

Project-Based vs. Hourly Pricing

Once you know your hourly rate, you have a choice: charge by the hour or charge by the project. Each approach has tradeoffs.

Hourly pricing

• Pros: Simple, transparent, and you get paid for every hour worked. Scope creep is less risky because additional work means additional pay.
• Cons: Creates an income ceiling tied to your time. Clients may push back on hours or micromanage. And you're penalized for getting faster and more efficient.

Project-based pricing

• Pros: Rewards efficiency. As you get better and faster, your effective hourly rate goes up. Clients know the total cost upfront, which makes budgeting easier for them.
• Cons: Requires good scope definition upfront. If a project takes longer than expected, your effective rate drops. You need enough experience to estimate accurately.

Many experienced freelancers use project-based pricing but calculate their quotes using their hourly rate as a baseline. They estimate the hours a project will take, multiply by their rate, and add a 15-20% buffer for unexpected complexity. Over time, they build up a library of project estimates that makes quoting faster and more accurate.

When to Raise Your Rates

A common mistake freelancers make is setting a rate and never changing it. Your rates should increase over time as you gain experience, build a reputation, and improve your skills. Here are signs it's time for an increase:

• You're fully booked. If you have no availability for new work, your rates are too low. Raise prices until demand matches your capacity.
• You haven't raised rates in 12+ months. Inflation alone erodes your purchasing power by 2-4% per year. Annual increases are standard.
• Your skills have materially improved. Certifications, portfolio wins, and expanded capabilities justify higher rates.
• Clients never push back on price. If every prospect immediately says yes, you're probably undercharging. Some price pushback is normal and healthy.
• Comparable freelancers charge more. Research what others with similar skills and experience charge in your market.

For existing clients, give 30-60 days' notice before a rate increase. A 5-10% annual increase is reasonable and most clients won't blink. If you're significantly undercharging, you might need a larger jump, but consider phasing it in over two increases rather than one.

Common Rate-Setting Mistakes

• Racing to the bottom. Competing on price attracts price-sensitive clients who undervalue your work. Compete on quality, reliability, and expertise instead.
• Not accounting for taxes. That $50/hour rate feels great until you realize $15-20 of it goes to taxes. Always think in after-tax terms.
• Forgetting about non-billable time. If you charge $75/hour but only bill 60% of your working hours, your effective rate is $45/hour.
• Undervaluing specialized skills. Generalists earn average rates. Specialists earn premium rates. If you have niche expertise, charge accordingly.
• Anchoring to employee salary. The divide-by-2,080 approach ignores all the hidden costs of self-employment. Use the full formula instead.

The Bottom Line

Setting the right freelance rate is about math, not guesswork. Add up your target income, self-funded benefits, taxes, and overhead. Divide by realistic billable hours. The resulting number might be higher than you expect, and that's okay. You're not just selling an hour of your time. You're selling expertise, flexibility, and results. Price accordingly, review annually, and don't be afraid to charge what you're worth.