How to Price Freelance Services: Why a Salary-Based Hourly Rate Falls Short

The most common freelance pricing mistake is a simple one: take the salary you want, divide by 2,080 (the hours in a standard work year) and call it your hourly rate. A $70,000 salary becomes about $34 an hour. It feels reasonable. In the worked example below, it comes to about one third of the rate needed.

Here is why, and how to work out a rate that pays for the business as well as the person.

What a freelance rate has to cover

The problem

Employees receive more than their pay. They also receive an employer's share of payroll tax, health insurance, paid holidays, sick leave, software and equipment, and time to do admin, learn and find work while being paid. A freelancer pays for all of it out of revenue. Copying a salary into a rate skips most of that.

Why it is harder than it looks

• Billable time is a fraction of your working time. Sales, admin, invoicing, learning, emails and gaps between clients are unpaid.
• Taxes are larger than expected. As our self-employment tax guide explains, you pay both halves of payroll tax, about 14% of profit, plus income tax.
• Time off is not paid. Holidays and sick days reduce the weeks you can bill.
• The market gives noisy signals. Competitors' rates are visible, but their costs, skills and volumes are not.
• Underpricing feels safe, because it wins work. The cost arrives later, as burnout and thin margins.

The gap in most advice

Guides tell you to "charge more" without showing the arithmetic. The important step they skip is dividing by billable hours and not by all hours. The same annual target produces very different rates depending on how much of your time you can actually bill:

1. At 80% utilisation you are billing nearly all your working time, which can be hard to sustain for someone who also finds their own work.
2. At 50% you spend as much time on the business as on client work, which is common in the first years.

Knowing your utilisation is what turns a guess into a price.

The formula

Use each step in order. The numbers are illustrative assumptions, so replace them with your own.

The 25% tax rate is a rough planning figure for combined income and self-employment tax, not an IRS rule. Refine it with your accountant.

The plot: how much utilisation changes your rate

The chart holds everything else constant and changes only how many hours you bill. The first bar shows the naive salary-divided-by-2,080 method.

At 60% utilisation the required rate is more than three times the naive one ($108.33 against $33.65). Dropping to 50% pushes it to $130. Improving utilisation, or moving away from hourly pricing, is worth as much as any rate increase.

Choosing a pricing model

A strategy for setting and raising rates

1. Calculate your floor with the formula, using honest utilisation.
2. Test the market. Check what similar specialists charge for comparable work, then price by the value you deliver, not only the cost you have.
3. Quote projects with a buffer for revisions and the unexpected.
4. Raise rates for new clients first, then for existing ones once a year.
5. Track your real utilisation for a few months and update the formula.

Step-by-step solution

1. Write down your annual take-home target, health cost and retirement goal.
2. Estimate business expenses for the year.
3. Gross up for tax at a rate you and your accountant agree on.
4. Count working weeks after realistic time off.
5. Estimate utilisation honestly, then compute the hourly rate.
6. Convert to project and retainer prices by multiplying the rate by expected hours, plus a buffer.
7. Add scope terms to the contract: number of revisions, what counts as extra, and how extras are billed.
8. Set a review date twice a year to check rate, utilisation and income.

Common mistakes

• Dividing salary by 2,080 hours
• Assuming every working hour is billable
• Forgetting taxes, health insurance and retirement
• Quoting fixed prices without limiting revisions
• Not raising rates for existing clients
• Discounting to win work, then resenting the client

Frequently asked questions

Educational content, not financial or tax advice. All figures are illustrative assumptions. Use your own numbers and talk to an accountant about your tax rate.