How to Set a Freelance Rate That Is Not Secretly a Pay Cut
Why dividing a salary by 2,080 hours produces a rate that loses money, and how to work backwards from the take-home you actually want.
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The standard advice is to take the salary you want, divide by 2,080 hours, and add a bit. That gives $80,000 ÷ 2,080 = roughly $38 an hour.
Charge $38 an hour and you will earn considerably less than an $80,000 employee. Here is where it goes.
2,080 hours is not a real number
It is 40 hours a week for 52 weeks. Nobody works that.
An employee on $80,000 gets paid holiday, public holidays and sick days — call it six weeks. They are still paid for 52 weeks. You are not. You can only invoice the weeks you actually work.
That alone takes you from 2,080 hours to about 1,840.
Then there are the hours you work but cannot bill
This is the number that surprises people. Every hour spent on:
- finding and pitching work
- writing proposals that go nowhere
- invoicing and chasing late payment
- bookkeeping and tax admin
- learning the thing the next client needs
- revisions you did not scope
is an hour you worked and cannot charge for.
At 70% billable, your 1,840 hours become 1,288 billable hours. You have lost nearly 40% of your year before pricing anything.
The optimism trap
Almost everyone doing this calculation for the first time puts 85% or 90% in the billable box. Then the year happens. If you are new, use 60% — you will spend more time finding work than doing it.
Then tax, which is higher than you are used to
As an employee, your employer quietly paid half of your Social Security and Medicare. Self-employed, you pay both halves — 15.3% of self-employment earnings, on top of income tax.
For most freelancers, federal income tax plus self-employment tax lands somewhere between 25% and 30% of profit. State tax, where it applies, sits on top.
Then the things that used to be invisible
An employer was also paying for:
| What | Typical annual cost |
|---|---|
| Health insurance | $6,000–15,000 |
| Retirement contributions | Whatever you choose |
| Equipment and software | $2,000–6,000 |
| Professional insurance | $500–2,000 |
| Accounting | $800–2,500 |
None of that appears on a payslip. All of it now comes out of your rate.
Working it backwards
The right order is:
- Start with the take-home you want.
- Add retirement contributions.
- Gross up for tax — divide by (1 − your tax rate), do not just add the percentage. This is the step most people get wrong.
- Add business expenses and health insurance.
- Divide by billable hours, not working hours.
For $80,000 take-home, six weeks off, 70% billable, $6,000 expenses, $6,000 health insurance and a 25% effective tax rate, that comes out around $92 an hour — roughly two and a half times the naive $38.
That is not greed. That is the same standard of living.
Why grossing up matters
If you need $80,000 after 25% tax, you do not need $100,000. You need $80,000 ÷ 0.75 = $106,667. Adding 25% instead of dividing leaves you about $6,700 short, every year.
A few things worth knowing once you have the number
It is a floor, not a price. This calculation tells you what you cannot go below without losing money. What you charge above it depends on the value of the work, not the hours.
Charging too little costs you work. Clients read price as a quality signal. An unusually low rate invites scrutiny rather than gratitude.
Move off hourly when you can. Hourly billing caps your income at your capacity and penalises you for getting faster. Project and value-based pricing break that link. But you still need the hourly floor to know whether a project price is sane.
Run your own numbers before you quote the next job. The gap between the naive figure and the real one is usually large enough to change what you say.