How to Set an Hourly Rate From Your Annual Income Goal
A common way to set a freelance or contractor rate is to take the yearly income you want, divide by the roughly 2,080 hours in a 40-hour work year, and quote the result. It is simple and it nearly always undercharges, because a self-employed person is not paid for every hour of the working week.
The honest calculation starts from what the business must earn, then divides by the hours you can realistically bill. This guide walks through it with a worked example and shows how sensitive the answer is to your billable share.
Why salary divided by 2,080 fails
An employee is paid for holidays, sick days, training and the time spent on admin. When you work for yourself, none of that time earns money unless you build it into the rate. You also pay costs an employer would normally cover: software, equipment, insurance, accounting, and often your own benefits and savings.
Dividing a 60,000 goal by 2,080 gives 28.85 an hour. As the next sections show, a freelancer aiming for the same pay will need roughly double that.
Step by step: from income goal to rate
- Set the pay you want. Decide how much you want to pay yourself for the year.
- Add yearly business costs. Software, insurance, equipment, a workspace, accounting, marketing. Include money you set aside for tax or retirement if those come out of your earnings, using figures that apply where you live.
- Count the weeks you will work. Subtract holidays, public holidays, sick days and training from 52.
- Estimate your billable share. Of your working hours, how many are paid client work, as opposed to emails, quotes, invoicing and finding new clients?
- Divide. Revenue needed divided by billable hours is your break-even rate.
hourly rate = (target pay + business costs) ÷ (working weeks × hours per week × billable share)
Worked example: the target pay is 60,000 and business costs are 8,400, so the business must bring in 68,400. You expect to work 46 weeks of 40 hours, which is 1,840 hours, and 65% of them will be billable: 1,840 × 0.65 = 1,196 billable hours. The rate is 68,400 ÷ 1,196 = 57.19 an hour.
Do not forget costs that arrive in lumps. A 1,800 laptop replaced every three years is 600 a year, so it belongs in the 8,400 as 600 rather than as a surprise later. The same goes for software renewals and professional fees.
Compare that with the naive 28.85. The gap is explained by the 8,400 of costs, the unpaid weeks, and the 35% of working time that cannot be billed.
The billable share moves the answer most
Keeping the same pay, costs and working weeks, here is how the rate changes with the share of time you can bill:
| Billable share | Billable hours | Hourly rate |
|---|---|---|
| 50% | 920 | 74.35 |
| 65% | 1,196 | 57.19 |
| 80% | 1,472 | 46.47 |
A very high billable share is hard to sustain, because winning work and running the business take time. If you are new to freelancing, test the figure against a few weeks of tracked hours rather than guessing.
Turning the rate into a project quote
For a fixed-price project, estimate the hours, add a buffer for revisions and surprises, then multiply by your rate. If you think a job will take 30 hours and you add a 15% contingency, you quote for 30 × 1.15 = 34.5 hours, which at 57.19 is about 1,973.
The estimate is only a starting point. Check it against what similar work sells for, the value the client gets, and what you are comfortable with. A rate built from your costs shows the minimum that keeps you whole, and you can charge more where the market allows.
Checking your numbers
- Use the hourly to salary calculator to see what an hourly figure comes to over a standard full-time year, and keep in mind that you will bill only part of that year.
- Use the salary to hourly calculator for the employee-style comparison, remembering that it divides over paid hours, not billable ones.
- Recalculate once a year, or whenever your costs or workload change.
This article is general education about a pricing method, not tax, legal or financial advice. Self-employment costs, taxes and benefits vary by country, so confirm the figures with a qualified professional.
- Salary to Hourly Calculator: Enter what you earn, how often you are paid and how much time you really work, and the calculator returns the equivalent hourly, daily, weekly, monthly and yearly figures.
- Hourly to Salary Calculator: Type in your hourly rate and your usual schedule. The calculator turns it into yearly, monthly, weekly and daily pay, taking unpaid holidays and vacation days off the total.
This article is general information, not professional advice. See our Disclaimer and Editorial Policy.
More articles
15-Year vs 30-Year Mortgage: Payment, Interest and Trade-offs
A shorter mortgage costs far less in interest but asks for a much higher monthly payment. A side-by-side example shows the size of both effects.
APR vs APY: What the Two Rates Really Tell You
APR and APY are two ways to quote the same rate. One ignores compounding and one includes it, and mixing them up can make a worse deal look better.
APR vs Interest Rate: What the Difference Means for a Loan
A loan with the lower interest rate is not always the cheaper loan. The APR folds in certain fees so offers can be compared, and a worked example shows how.