How to Set a Freelance Rate

The most common way to price freelance work is to take the salary you used to earn, divide by 2,080 hours, and quote that. It is fast, it feels defensible, and it is usually less than half of what the work actually needs to cover.

The reason is that a salary is the smallest part of what an employer spent on you. Everything else — the employer half of payroll tax, the health premium, the match, the vacation days, the laptop, the software licenses, the fourteen weeks a year you weren't billable — was invisible and is now yours. This page is the arithmetic for making it visible.

One thing to be clear about up front: nothing here predicts what anyone will pay you. Markets set prices, not spreadsheets. What this calculation tells you is the floor beneath which the work costs you money — which is a smaller claim and a far more useful one.

Step one: rebuild the employer's side of the ledger

Start with the annual compensation figure you're replacing. Then add the things that used to arrive without an invoice.

The payroll tax is the cleanest one. As an employee you paid 6.2% for Social Security and 1.45% for Medicare, and your employer quietly paid a matching 7.65%. Self-employed, you pay both halves as self-employment tax. IRS Topic 554 sets the rate at 15.3% — "12.4% for Social Security and 2.9% for Medicare" — applied to 92.35% of your net earnings from self-employment, with self-employment tax owed once net earnings hit $400. You do get to deduct one half of the self-employment tax in figuring adjusted gross income, which softens it but doesn't remove it.

Then benefits. Pull your old benefits statement if you still have one, or your final pay stub, and find the employer contribution lines: the employer share of health, dental and vision premiums, the 401(k) match, employer-paid life and disability. That's a number you now have to generate yourself. Health insurance in particular is the line most freelancers underestimate by the widest margin.

Then the business costs an employer absorbed invisibly: software subscriptions, professional liability or errors-and-omissions insurance, an accountant, a computer replaced every few years, the work share of phone and internet, a business bank account, a website, professional dues, and the time and cost of finding clients.

Step two: count the hours you can actually bill

A full-time year is 40 × 52 = 2,080 hours. Nobody bills 2,080 hours, and planning as if you might is the second big error.

Take out the time off you'd want a salaried job to have given you — say 15 vacation days, 10 holidays and 5 sick days, which is 30 days, or 240 hours. That leaves 1,840 working hours.

Then take out the work that doesn't have a client attached: proposals, contracts, invoicing and chasing invoices, bookkeeping, marketing, sales calls that go nowhere, keeping your skills current, and the administrative sludge of running a one-person company. Planning at 50–65% billable is realistic for most solo practices; new freelancers usually run lower.

At 60% billable: 1,840 × 0.60 = 1,104 billable hours in the year.

Step three: divide, and brace yourself

Here's the whole thing worked through with illustrative figures. Substitute your own.

• Compensation you're replacing: $70,000.
• Employer-side payroll tax you now cover yourself: 7.65% of $70,000 = $5,355.
• Benefits the employer was buying: health premium share $7,200, 401(k) match at 4% = $2,800, life and disability $400. Total $10,400.
• Business operating costs: software, insurance, accountant, hardware, phone and internet share = $6,000.

Revenue the year has to produce: $70,000 + $5,355 + $10,400 + $6,000 = $91,755.

Divided by 1,104 billable hours, that's $91,755 ÷ 1,104 = $83.11 an hour.

The naive calculation — $70,000 ÷ 2,080 — gives $33.65. The gap between $33.65 and $83.11 is not greed. It is the cost of the things that used to be somebody else's problem, and quoting the smaller number means working a full year to fund a pay cut you never agreed to.

The floor below which the work loses money

There are two floors, and they're different.

The hard floor is your fixed business costs spread across billable hours. In the example above, $6,000 of operating costs across 1,104 hours is $5.43 an hour that leaves before you're paid anything at all. Any project priced near that isn't underpaid work; it's a donation with paperwork.

The real floor is higher and it's the one that matters: the rate at which the hour is worth more than the alternative use of that hour. Sometimes the alternative is another client. Often — and honestly — the alternative is a W-2 job with a payroll department and an employer match, and running this calculation is exactly how you find out whether that's the better deal. Our gig worker guide walks through the same comparison from the other direction.

One structural warning about the arithmetic: it only works at the utilization you assumed. Set your rate off 1,104 billable hours and then bill 700, and the rate was wrong by 58%. Recompute in July using the first half of the year's actual billable hours, not the ones you hoped for in January.

The tax arithmetic, since it's the part people forget

Self-employment tax is calculated on net profit, not on gross receipts. Suppose net profit for the year lands at $60,000.

• Multiply by 92.35%: $60,000 × 0.9235 = $55,410.
• Apply 15.3%: $55,410 × 0.153 = $8,477.73 of self-employment tax.
• Deduct half of that — $4,238.87 — in figuring adjusted gross income.

Our explainer on self-employment tax takes that calculation apart properly, including the safe harbors for quarterly payments. For rate-setting purposes the only thing you need is the size of it.

That $8,477.73 is owed before any income tax at all, and no one is withholding it for you. The IRS wants estimated payments four times a year, and the 2026 standard deduction — $16,100 for a single filer, $32,200 for married filing jointly — reduces income tax but does nothing to self-employment tax. Move 25–30% of every payment into a separate account the day it clears. Our side hustle tax guide covers the quarterly mechanics.

There's also an additional 0.9% Medicare tax on self-employment income above the threshold for your filing status — $200,000 for a single filer. If you're near that, it's a line item, not a surprise.

Four ways freelancers price themselves into trouble

1. Quoting before building the sheet. The first number out of your mouth becomes the anchor for the whole relationship, and "actually I need to raise that" three weeks later costs more credibility than a two-day delay would have.
2. Discounting for exposure, portfolio value, or the promise of future work. Future work at a discounted rate is a discounted rate that lasts longer. If you want to do a project below rate for a reason you'd defend out loud — a cause, a skill you're buying, a person you owe — do it deliberately and write down why.
3. Pricing by the hour on a project whose scope isn't defined. Hourly billing without a scope document means every change is an argument. Estimate the hours, price the project, and put a change-order clause in the contract.
4. Racing a competitor whose costs you can't see. Someone quoting half your rate may have a spouse's health plan, a paid-off house, or a spreadsheet they've never built. Their number tells you nothing about your floor.

And here is the honest negative that most freelance advice omits: for some people, at some rates, in some fields, the numbers won't work. If the market rate for your service is $45 an hour and your calculation says you need $83, the answer isn't to work more hours — it's to change something structural. Raise the value of what you deliver, cut the cost base, specialize into a segment that pays more, or go back to a salaried job with the option to freelance on the side. Running the arithmetic and disliking the result is still a successful use of an afternoon.

Do this today

1. Open a spreadsheet with four rows: compensation target, employer-side payroll tax, benefits to replace, business operating costs. Sum them.
2. Below that, put 2,080, subtract your intended days off in hours, and multiply by a billable percentage you'd bet money on rather than one you'd like.
3. Divide. That's your baseline hourly rate.
4. Write down the project rate you'd quote for your three most common engagement types, in dollars, so you're not inventing them on a call.
5. Set a calendar reminder for six months out to redo it with real utilization data.

Then go find out what the market says about that number. The spreadsheet gives you the floor. Only clients give you the price.