Should freelancers include taxes in hourly rate math?

Yes. Use a planning reserve so the rate reflects gross revenue required before taxes are paid.

What is a realistic billable-hours assumption?

It depends on the business, but many solo operators should pressure-test anything above 25 to 30 true billable hours per week.

Is this tax or accounting advice?

No. It is educational pricing math for planning, not professional tax, legal, or accounting advice.

How to calculate your freelance hourly rate

Use the Freelance Hourly Rate Calculator

Your rate is not your desired salary divided by 2,000 hours. That math is how freelancers accidentally build themselves a shitty job.

A better estimate starts with desired personal income, realistic billable hours, business expenses, tax reserve, savings/retirement, and a profit or slow-month buffer.

If you charge what you made at your corporate job divided by the standard 40-hour work week, you are ignoring the fact that your employer paid for your health insurance, your laptop, your software subscriptions, the employer side of payroll taxes, and your paid time off. You also didn’t spend half your week doing unpaid marketing and admin. Now you do.

The Formula Explained Plainly

To find a sustainable rate, you have to work backward from what you need to take home, scale it up to cover all the things that eat your money, and then divide it only by the hours you actually get paid for.

Calculate Target Net Income: Start with your personal needs. Let’s say you need $70,000 to cover your personal life (rent, food, fun).
Add Savings and Retirement: You are your own 401(k) match now. Add your savings goal (e.g., $10,000). Total personal need: $80,000.
Gross Up for Taxes: Freelance taxes are brutal. If your effective tax rate is 25%, you need to earn enough so that after losing 25%, you still have $80,000. That’s 80,000 / (1 - 0.25) = $106,666. This is your Required Owner Draw.
Add Business Expenses: Add the cost of running the business—software, health insurance, accounting, equipment. Let’s say $12,000 a year. Total business revenue needed: $118,666.
Add a Profit/Slow-Month Buffer: You will have bad months. Add a 10% buffer to protect your business. Total target revenue: $130,532.
Calculate Billable Hours: You don’t work 52 weeks a year, and you don’t bill 40 hours a week. Take 48 weeks, multiply by 20 billable hours per week = 960 billable hours a year.
Find the Rate: Divide your target revenue ($130,532) by your billable hours (960). Your minimum sustainable rate is $136/hr.

Practical Example

Let’s look at Jane, a freelance designer.

Jane wants to take home $85,000 a year. She also wants to save $15,000 for retirement. Her total personal need is $100,000. Jane estimates her effective tax rate at 25%. To have $100k left over, she needs to gross $133,333. Her business costs (Adobe CC, Webflow, health insurance, CPA) run $1,500 a month ($18,000/year). This brings her required gross business revenue to $151,333. She adds a 10% profit buffer, bringing her target to roughly $166,466.

Jane takes 4 weeks of vacation. That leaves 48 working weeks. She spends half her time on sales, marketing, admin, and email. She only bills 20 hours a week. Total billable hours: 960.

Jane’s minimum hourly rate: $166,466 / 960 = $173.40/hr.

If Jane had just divided $100k by 2,000 hours, she would have charged $50/hr and gone bankrupt by October.

Assumptions Built Into This Model

Billable Capacity: This model heavily relies on your honest assessment of billable vs. unbillable time. Most freelancers hover between 40% and 60% billable.
Tax Rates: Tax rates vary wildly by location and structure (e.g., Sole Prop vs. S-Corp). The percentage used here is a blended effective rate of income and self-employment taxes.
100% Collection: This assumes every billable hour is actually collected. If you have bad debt, your required rate goes up.

FAQs

Why shouldn’t I just charge what my old salary was?

Because your old salary was only part of your compensation. Your employer paid payroll taxes, benefits, overhead, and paid you for holidays. You also didn’t spend half your day trying to find your next client. Your freelance rate must cover all of that.

What if clients say my rate is too high?

Then they are not your clients, or you are selling the wrong value. If you lower your rate below your minimum sustainable threshold, you are actively subsidizing their business with your free time and lost margins.

Should I bill by the hour or by the project?

You should almost always transition to project-based or value-based pricing. However, you must always know your internal hourly rate so you can accurately estimate those project fees.

How much should I save for taxes?

A safe baseline for US freelancers is 25-30% of every dollar that hits your bank account. Put it in a separate account immediately. Do not touch it.

How many billable hours can I realistically work in a week?

If you are doing your own sales, marketing, and admin, aiming for 20-25 billable hours a week is realistic. Hitting 35+ billable hours consistently usually leads to burnout unless you outsource your operations.

Calculator: Project Quote Calculator - Use your new hourly rate to price fixed-fee projects safely.
Calculator: Effective Hourly Rate Calculator - Check if you are actually earning your target rate on fixed-fee work.
Guide: Fixed-Price Project Quote Formula - How to structure a quote that protects your margins.

Disclaimer: OwnerMath provides mathematical models, not financial, tax, or legal advice. Always consult a qualified CPA or financial professional to verify your tax rates and business structures.