Setting a freelance rate

The formula

There are three steps, and each one is a common place to go wrong.

The tax share is a division, not an addition

Divide by what you keep, instead of adding what you set aside. Setting aside a quarter means keeping three quarters of what you invoice, so the target is divided by 0.75, not increased by 25%. On a 60,000 target those give 80,000 and 75,000. That's 5,000 a year apart, every year, and you find the shortfall when the tax bill arrives.

You cannot bill every hour you work

A lot of the week goes on work no client pays for: quotes, invoices, chasing the invoices, admin, tools breaking, the call that turns into nothing, the work you redo for free. Say you work 40 hours a week for 48 weeks. That's 1,920 hours worked. At 60% billable, you have 1,152 hours you can charge for, and the rate that comes out is two thirds higher than dividing by 1,920 would give.

Divide by the hours you bill, not the hours you work. Using hours worked is the most common mistake in this calculation, and it leaves you paying for the unbilled hours out of your own time.

A worked example

Say you want 60,000 of income, have 8,000 of business costs and set aside 25%. That's 68,000 ÷ 0.75 = 90,667 to invoice across the year. At 48 weeks × 40 hours × 60% billable (1,152 hours), the rate is about 79 an hour, and a 6-hour billable day comes to roughly 472.

Why the quoted rate is rounded up

The exact rate just reaches the target, so any rate rounded down falls short of it. I recommend quoting the rate rounded up to the next whole unit, which is what the calculator gives you, with the exact rate beside it. The difference is never more than a unit an hour, and it falls on the right side of the target.

Hourly, day and project rates

A day rate is this hourly rate times the billable hours in a day, which can be fewer than the hours you work in a day. That's why the calculator asks for them separately. A project rate is this rate times the hours you expect the project to take, plus whatever you're willing to carry if it takes longer.

Take on fixed-price risk on purpose. A fixed price moves the risk of a bad estimate from the client to you. I'd quote one only when you've decided the risk of an overrun is worth carrying.