How to set an hourly rate you can actually live on
Dividing a target salary by 2,080 hours produces a rate that guarantees you earn less than the salary you wanted.
The short answer
Set an hourly rate from the income you need, plus overhead, divided by the hours you can actually invoice, then add a margin. The mistake nearly everyone makes is dividing by hours worked rather than hours billable, which understates the rate by around forty percent.
The formula
required revenue = target income + overhead
with margin = required revenue / (1 - target margin)
paid hours = working weeks x hours per week
billable hours = paid hours x billable ratio
rate = revenue with margin / billable hours
The billable ratio is the whole game. Quoting, invoicing, admin, marketing and learning are all unpaid and all necessary, and for most solo operators they consume between a third and a half of the week.
Worked example
A $60,000 target income, $14,000 of overhead, 46 working weeks, 40 hour weeks, a 60% billable ratio and a 15% margin:
required revenue = 60,000 + 14,000 = 74,000
with margin = 74,000 / 0.85 = 87,059
paid hours = 46 x 40 = 1,840
billable hours = 1,840 x 0.60 = 1,104
rate = 87,059 / 1,104 = 78.86
About $79 an hour to take home $60,000. Dividing the target by 2,080 hours gives $29 and would leave you earning roughly a third of what you planned.
Measuring your real billable ratio
Guessing it high is the standard error and it is optimistic in a specific way: people count the hours they intended to bill rather than the ones that appeared on an invoice.
Take last quarter. Divide the hours you actually invoiced by the hours you actually worked. For most solo consultants and trades the answer lands between 50% and 65%, and people who have never measured it usually expect 80%.
Overhead is bigger than the obvious list
Software, insurance, accounting, phone, equipment, professional bodies, training. Then the unglamorous ones: bank charges, the laptop replaced every three years, the mileage that never gets claimed.
It also includes the cost of not working. Six weeks off in the example above is holiday and illness combined, and if you plan for 52 weeks you have priced in never being ill.
When an hourly rate is the wrong unit entirely
An hourly rate punishes you for getting faster, which is the opposite of what experience should do. The better you get, the less you earn for the same result.
For work where the value is the outcome rather than the time, price the outcome. Keep the hourly figure anyway, as a floor and a check: if a fixed price divides out below your rate, you have discovered it before the job rather than after.
What this leaves out
- Before tax. The target income here is what the business needs to generate, not what lands in your account after tax and national insurance.
- Assumes a solo operator. With employees, price against their loaded cost per billable hour rather than your own.
- Excludes bad debt, which for some trades is significant and belongs either in overhead or in the margin.
This arithmetic is free to run in your browser — no signup, nothing held back.
Open the free calculatorCommon questions
- Why is my rate so much higher than an employee's salary per hour?
- Because an employee's employer is carrying overhead, unbillable time, holiday, sick pay, equipment and tax on top of the salary. Comparing a freelance rate to an hourly salary compares a whole business to one line of its cost.
- Should I discount for large projects?
- Only if the size genuinely lowers your cost, which usually means less selling and fewer setup hours per unit of work. A discount for size that does not reduce your effort is a pay cut you volunteered for.
- What if the market will not pay my calculated rate?
- Then the arithmetic has told you something useful early. Either the overhead is too high, the billable ratio is too low, or the work you are selling is not the work you should be selling. None of those get better by charging a rate that cannot support you.
Spreadsheets that do this
The formulas above, already built and checked — so you fill in your numbers rather than the arithmetic.
Pricing & Profit Margin Calculator
Set a price from cost and target margin, or check margin on an existing price.
- Google Sheets
- Excel
Freelancer Quarterly Estimated Tax Tracker
See the smaller, IRS-safe quarterly payment between two tax methods, from your client income log.
- Google Sheets
- Excel
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Last reviewed 22 August 2026