How to Set Your Freelance Hourly Rate (and Not Undercharge)
Here's the short version: your freelance rate should be much higher than your old salary divided by 2,080. As a freelancer you only bill a fraction of your hours, you pay your own taxes and benefits, and you need a profit buffer for the slow months. Build your rate from those four pieces — billable hours, expenses, taxes, and profit — and you'll stop quietly working for less than minimum wage.
Why salary ÷ 2,080 undercharges you
It's the most common freelance pricing mistake, and it's everywhere. A full-time year is roughly 2,080 hours (40 hours × 52 weeks), so people take their old $80,000 salary, divide by 2,080, and proudly quote about $38 an hour. It feels logical. It's also a trap.
That math assumes every working hour is billable and that your client is covering everything your employer used to. Neither is true. As an employee, your employer paid half your payroll taxes, gave you paid time off, and often chipped in for health insurance and retirement. The salary number you remember was your take after all of that was handled for you. Replicate it at $38 an hour and you'll fall far short.
Billable vs non-billable hours
This is the single biggest reason the 2,080 math breaks. You don't get paid for 2,080 hours a year — you get paid for the hours you actually invoice. Everything else is unpaid overhead that keeps the business alive:
- Finding work: proposals, sales calls, networking, marketing.
- Admin: invoicing, chasing payments, bookkeeping, email.
- Growth: learning new skills, updating your portfolio.
- Time off: holidays, sick days, and gaps between clients.
Realistically, many freelancers bill only 50% to 70% of their working hours, especially in the early years. If you want to bill 40 hours but only 25 are truly billable, your real rate has to cover the other 15 too. That alone means your effective hourly figure needs to climb by a third or more.
Covering expenses, taxes and time off
An employee's paycheck hides a lot of costs. As a freelancer, those costs are now yours, and your rate has to pay for them before you keep a single dollar. Three buckets matter most:
- Business expenses: software, hardware, a co-working desk, your website, insurance, and professional fees. Add up your yearly total and spread it across your billable hours.
- Self-employment taxes: you now owe both the employee and employer share of payroll taxes, plus income tax, and usually pay it quarterly. Set aside a healthy slice of every invoice — the exact percentage depends on your bracket and location, so check the current rates or talk to an accountant.
- Benefits you used to get free: health insurance, retirement contributions, and paid time off. If you want two weeks of vacation, those unpaid weeks have to be funded by the weeks you do work.
Build these into the rate from day one. If you treat taxes as a surprise at filing time, you'll have already spent the money. Our freelancer tax calculator can help you estimate what to hold back, and freelancer taxes explained walks through how self-employment tax actually works.
Adding a profit buffer
Covering your costs just gets you to break-even. A real business charges more than it spends — that extra is profit, and freelancing is a business. Your profit buffer does three jobs: it absorbs the slow months when work dries up, it funds growth and bigger equipment, and it rewards the risk you take by not having a guaranteed paycheck.
A common approach is to add a 10% to 30% margin on top of your fully loaded costs. Think of it this way:
Cover your costs, and you've bought yourself a job. Add profit, and you've built a business that can survive a quiet quarter.
If a slow month would put you in a panic, your buffer is too thin. Price for the bad weeks, not just the good ones.
Hourly vs project pricing
Once you know your minimum hourly rate, you can decide how to actually quote. Both models have their place:
| Hourly | Per project | |
|---|---|---|
| Best for | Open-ended or shifting scope | Clear, well-defined deliverables |
| Upside | Easy to track; extra hours get paid | You're rewarded for being fast |
| Risk | You're penalised for getting faster | Underestimating scope eats your margin |
The trap with hourly billing is that as you get better, you finish faster and earn less for the same result. Project pricing flips that: you quote a price for the outcome, estimate the hours behind the scenes using your hourly rate as the floor, and keep the gain when you work efficiently. Many experienced freelancers use their hourly number purely as an internal benchmark and quote everything as a flat project fee.
A worked example
Say you want to take home $80,000 a year. Watch how the real rate builds up:
- Target income: $80,000.
- Add taxes and benefits (roughly +35%): you now need to bill about $108,000.
- Add business expenses ($8,000): that's $116,000 of revenue to collect.
- Divide by billable hours, not 2,080: if you bill 25 hours a week for 46 weeks, that's about 1,150 billable hours.
- $116,000 ÷ 1,150 ≈ $101 per hour — and that's before adding any profit margin.
Compare that to the naive $80,000 ÷ 2,080 = $38. The honest rate is more than double. That gap is exactly why so many talented freelancers feel like they're hustling constantly and still falling behind — they priced the job, not the business. Plug your own numbers into the freelance rate calculator to see your real floor in a few seconds.
This is general educational information, not financial or tax advice. Tax rates and rules vary by location and change over time — check current figures or consult a professional. See our disclaimer.