How to Set Your Freelance Rates: The Formula That Works

Most new freelancers set their rates the same way: they take their old hourly wage, add a little, and hope it works out. That almost always leaves them underpaid, because a freelance rate has to cover things an employer used to pay for — taxes, health insurance, retirement, unpaid time off and business expenses. Nobody withholds anything for you, and nobody pays you for the hours you spend finding clients, invoicing them, or learning new tools.

The fix is not confidence or guesswork. It is a simple calculation: work out what you need to earn, add what it costs to run the business, and divide by the hours you can realistically bill. This guide walks through that formula with a worked example, shows how to check your number against the market, and explains the three pricing models — hourly, project and value-based — so you can quote work that actually pays your bills.

The Formula: Target Income Plus Costs, Divided by Billable Hours

Here is the whole method in one line:

(Target annual income + business costs) ÷ realistic billable hours per year = your minimum hourly rate

That number is a floor, not a price. It is the lowest rate at which the business works. Quote projects on their value to the client, as long as the number clears that floor with margin. If a quote comes in below the floor, you are paying the client for the privilege of working for them.

Start with your target annual income. This is what you actually want to take home, not what you made at your last job plus 10%. Be honest about it: rent, food, transport, savings, the life you want to live. A target that is too low produces a rate that is too low, and you will feel it every month.

Then add your business costs. Software subscriptions, hardware, insurance, accounting, marketing, coworking, phone and internet — everything the business needs to run. Most solo freelancers land somewhere between $5,000 and $20,000 a year here, depending on the trade. Do not skip the small ones; they add up fast.

Then add tax. As a freelancer you owe income tax plus self-employment tax of 15.3% on most of your net earnings — the Social Security and Medicare share an employer would normally split with you. A rough rule used by many freelance guides: multiply your desired take-home by 1.35 to 1.40 to get the gross income you need to actually net that amount. If you want a precise figure, run the numbers through our Freelance Rate Calculator, which grosses the figure up for the tax you will owe.

The last input is the one people get wrong most often: realistic billable hours. You cannot bill 40 hours a week. Between admin, sales, marketing, invoicing and actual time off, most full-time freelancers bill 20 to 25 hours a week — about 1,000 to 1,300 hours a year. Plan on 1,000 to 1,200 if you are starting out. The gap between 40 hours and 25 hours is the billable hours trap that quietly bankrupts new freelancers who price as if every working hour were paid.

A Worked Example: The $80,000 Freelancer

Take a freelance writer who wants to take home $80,000 a year. Her business costs run $15,000 — software, a laptop replacement fund, insurance, accounting and a coworking desk. Grossing up for tax, she needs roughly $95,000 in revenue before costs, or about $110,000 in total billings once costs are included. (The exact gross-up depends on her tax bracket; the 1.35 to 1.40 multiplier is a safe planning figure.)

She can realistically bill 1,100 hours a year — 22 hours a week across 50 working weeks. The maths:

$95,000 ÷ 1,100 hours ≈ $86 per hour

That is her floor. She should not accept work below $86 an hour unless there is a clear strategic reason — a foot in the door with a dream client, a portfolio piece, a retainer that guarantees volume. And even then, she should know exactly what the discount is costing her.

Another widely cited example makes the same point from the salary side: a $75,000 salary-equivalent target, with benefits and costs added in, works out to about $90 an hour of billable time. The pattern is consistent — the hourly rate that replaces a salary is always much higher than the salary divided by 2,080 hours, because the employer was paying for far more than the salary.

How to Check Your Rate Against the Market

Your floor tells you what you must charge. The market tells you what you can charge. Check both, and price in the overlap.

First, look at what others in your niche actually charge — not what they advertise. Ask peers in your niche Slack group or mastermind and swap ranges, not client names. Check contract rates on job boards that list them: We Work Remotely, Authentic Jobs and niche boards like Dribbble for design often show hourly or day rates. Look at the Bureau of Labor Statistics Occupational Outlook for your role as a US baseline, then adjust for your city and specialty.

Second, use freelancer surveys as directional data, not gospel. Freelancers Union and similar surveys are self-reported and skewed toward whoever answered, but they are useful for spotting whether your number is wildly out of line.

Third, remember that your rate is not what competitors charge. It is the minimum you need to earn plus the premium for the outcome you deliver. Two freelancers with the same skills can justify very different rates if one delivers work that directly moves a client’s revenue. Underpricing creates resentment and cash-flow gaps; overpricing without justification loses bids. Math first, positioning second.

Hourly, Project or Retainer: Pick the Model That Fits the Work

Most freelancers mix models by client type. The right choice depends on who bears the risk of the scope changing.

Hourly is best when the scope is unclear, the work is exploratory, or the client wants a time log. You get paid for every hour; the client bears less risk of overruns. The weakness is that you cap your income by available hours, and clients can get anxious about an open-ended bill. Hourly works well for ongoing small tasks and new clients you have not worked with before.

Project (fixed fee) is best when the deliverables are defined — a logo package, a five-page website, a 30-day social calendar. The client knows exactly what they are paying, and you can price on value rather than time. The risk is scope creep: you absorb it unless the contract defines revision limits. Price 15 to 25% above your hourly estimate to cover admin and unknowns. To quote a project well, estimate the hours honestly, multiply by your floor rate, add a 20 to 30% buffer for the revision round that always runs long, then round to a clean number. A brand identity package estimated at 18 hours at $75 an hour is $1,350; with a 25% buffer that becomes about $1,690.

Retainer is best for ongoing work with a predictable shape — a set number of hours or deliverables each month. It smooths your income and gives the client priority access. Price retainers slightly below your hourly rate in exchange for guaranteed volume, but never below your floor.

Value-based pricing is worth learning once you have experience. Instead of pricing on time or even market rates, you price on the value your work creates for the client — a conversion lift, a compliance risk avoided, hours automated. It only works when the outcome is measurable and the client can see the return, but it is how experienced freelancers escape the hourly ceiling entirely.

Day rates deserve a mention too. If a client wants you on site for a day, multiply your hourly rate by 6 or 7, not 8, to leave room for meetings and context switching. At $140 an hour, that is $980 — quote $1,000 a day.

Should You Charge Hourly or Per Project?

This is the question every new freelancer asks, and the honest answer is: it depends on the job, not on you. Use hourly when the scope is vague or evolving, when the client is new, or when the work is open-ended support. Use a project fee when you have built the same deliverable before and can estimate it accurately, when the client needs budget certainty, or when your speed is an advantage — a fast freelancer loses money on hourly work.

Either way, the floor rate governs both. A project quote is just your hourly floor multiplied by honest hours, plus a buffer, then priced against the value to the client. If the value price is lower than the cost price, walk away or renegotiate the scope. Taking underpriced work to “build the relationship” is how freelancers end up with a full calendar and an empty bank account.

Raising Your Rates Without Losing the Client

The right time to raise your rates is before you feel ready, not after. The signals are consistent: you are booked solid, you are turning work away, your skills have clearly improved, or your costs have risen. Review your rates at least once a year, and sooner whenever you are booked out or turning work away.

Apply the new rate to new clients first — that is the lowest-friction way to move up. For existing clients, give 30 to 60 days’ notice in writing, state the new rate plainly, and tie the increase to scope, market rates or added value rather than guilt or apology. Do not retroactively change signed statements of work. A 10% to 20% annual increase is common in consulting industries and not unusual to clients who work with freelancers regularly. Existing clients rarely leave over a reasonable, well-communicated increase; they leave when the increase feels sudden, unexplained or punitive.

One practical note: keep your admin tight as your rates rise. Invoicing, expense tracking and tax records get more important, not less, as your income grows. Modern AI tools for bookkeeping and invoicing can take much of that admin off your plate for a small monthly cost, which is exactly the kind of business expense your rate is supposed to cover.

The Bottom Line

Setting freelance rates is arithmetic, not self-esteem. Add your target income to your business costs, gross the figure up for tax, and divide by the hours you can realistically bill — usually 20 to 25 a week, or about 1,100 a year. That number is your floor. Check it against the market, choose the pricing model that fits each job, and raise it deliberately every year. Freelancers who do the maths once and revisit it annually almost never stay underpaid for long.

Frequently Asked Questions