Why You Can't Just Divide Your Old Salary by 2,080 Hours
A common mistake: take your desired annual salary, divide by 2,080 (40 hours × 52 weeks), and use that as your freelance rate. This dramatically underprices your work, because it ignores several categories of cost a traditional employer absorbs on your behalf.
What Your Rate Actually Needs to Cover
- Self-employment tax — an extra 15.3% (roughly, on top of income tax) that a traditional employer would have split with you as an employee.
- Health insurance — no employer subsidy, so you're covering the full premium yourself.
- No paid time off — vacation, sick days, and holidays are all unpaid unless you build the cost into your rate.
- Unbillable time — invoicing, client acquisition, admin work, and skill development don't generate revenue but still take real hours.
- Business overhead — software subscriptions, equipment, insurance, and potentially a portion of home office costs.
- Retirement savings — no employer 401(k) match, so you need to self-fund retirement contributions.
A Simple Formula
True Hourly Rate = (Target Annual Salary + Overhead + Taxes + Benefits) ÷ Billable Hours per Year
Most freelancers only bill 50-70% of their working hours — the rest goes to admin, marketing, and finding new clients. If you work 40 hours/week but only bill 25 of them, your annual billable hours are roughly 1,300, not 2,080.
A Worked Example
- Target take-home equivalent to a $70,000 salary
- Add ~15% for self-employment tax burden: +$10,500
- Add health insurance: +$6,000/year
- Add business overhead (software, equipment): +$3,000/year
- Total needed: ~$89,500/year
- Assume 1,300 billable hours/year (25 hours/week × 52 weeks)
- True hourly rate needed: ~$69/hour
Compare this to the naive calculation of $70,000 ÷ 2,080 = $33.65/hour — less than half the actual rate needed to hit the same real income.
Adjusting for Experience and Market Rates
This formula gives you a floor, not a ceiling. Once you know your minimum viable rate, compare it against market rates for your skill level and niche — if the market supports a higher rate, charge it. Underpricing relative to the market doesn't make you more competitive; it often signals lower quality to potential clients.
Revisit Your Rate Regularly
As your skills, portfolio, and demand grow, your rate should grow with them. Many freelancers review and raise rates annually, or whenever they notice they're consistently fully booked — a sign the market will bear a higher price.