Freelance rate: calculate an hourly rate you can live on

Finding the first client is rarely the hardest part of freelancing. Setting a freelance rate you can live on for years is. Many new freelancers divide their old salary by the hours they used to work and add a little. That ignores everything an employer used to pay for: holidays, sick days, pension, equipment, insurance and the sales and admin hours no client pays for.

Below is a method that works in any country and any currency, a worked example in euros, and an overview of how major markets tell a genuine contractor from an employee in disguise.

Why an hourly rate is not an hourly wage

An employee's hourly wage is pure income. Your freelance rate has to carry a whole business: tax and social contributions, business costs, reserves for illness and retirement, and the unpaid hours you spend finding and serving clients. Only what is left equals a salary. That is why a freelancer who charges double the hourly wage of a comparable employee often earns no more than that employee.

How to calculate your freelance rate in five steps

1. 01

   Decide the income you need

   Start from your private budget: housing, household costs, private insurance and savings. That is the net amount the business must pay you each year. Then work back to the profit before tax that leaves you this amount after income tax and social contributions in your country.

2. 02

   Add reservations for pension, illness and holidays

   Nobody pays your pension or sick pay any more. Add pension saving and the premium for income protection or disability insurance to your target. Holidays come in the fourth step: you simply bill fewer weeks.

3. 03

   Add your business costs

   Equipment, software, professional liability insurance, a desk or workspace, phone and internet, training, an accountant, travel and marketing. Compare your total with your industry in the profit and cost benchmark.

4. 04

   Estimate realistic billable hours

   Take the weeks in a year and subtract holidays, public holidays and a sick-day allowance. Then estimate how many hours per week you can actually invoice once sales, admin, travel and learning are done. For most freelancers that is well below a full working week.

5. 05

   Divide, then test against the market

   Divide profit target plus costs by billable hours. That is your rate floor, excluding VAT or sales tax. Compare it with what clients pay for similar work. If the market sits far below your floor, change the offer, the niche or the cost base, not just the number.

Worked example: a freelance UX designer

Mira leaves an in-house design job to work as a freelance UX designer. She needs €3,000 a month net for her household. She wants to save for a pension and insure her income against long-term illness. For the example we assume that income tax and social contributions take 28% of her profit; your own rate will differ.

Fictitious Firmfocus example. The tax percentage is an assumption for illustration, not a tax calculation. In many countries pension contributions reduce taxable profit, which would lower the profit needed.

The billable hours drive the result more than anything else. If Mira manages only 20 billable hours a week, her floor rises to €82 an hour (€72,000 / 880). If comparable designers in her market charge between €60 and €80, she has room at 26 hours but not at 20. That tells her to protect her billable time, for example by packaging work into fixed-price projects that cut down on unbilled meetings.

Contractor or employee: the rules on misclassification

A freelancer who works long-term for one client, under its direction and at a wage-like rate, can look like an employee to the tax authority. If the relationship is reclassified, the client may owe payroll taxes and you may lose the tax treatment of a business. Each country has its own test, but all ask who controls the work, who carries the financial risk and how independent you really are.

Whatever your country, these habits support your position as an independent business:

• Several clients: work for more than one client, or show that you are actively looking for others.
• Your own method: decide how the work is done, use your own tools and carry your own risk for mistakes.
• A business rate: charge a rate that covers a business, not a disguised wage.
• Your own paperwork: use your own terms, quotes and invoices, and agree results rather than hours where you can.
• Visible as a business: a website, a business registration and professional insurance all count.

Protecting your income: insurance and pension

An employee who falls ill keeps some income; a freelancer usually does not. Price income protection or disability insurance into your rate before you meet your first client, because a premium that is not in the rate is the first thing you cut. A cash reserve covers a short illness but rarely long-term incapacity. See business insurance for professional liability and other cover.

Nobody builds your pension either. Decide a monthly amount, make it automatic and check whether your country gives the self-employed tax relief on contributions. How you take money out is covered in pay yourself.

Small start vs larger start

Pitfalls

• Copying your old salary: dividing your former salary by your former hours ignores tax, costs, holidays and unbilled time.
• Counting a full working week: planning on forty billable hours leaves no time for sales and admin, and the rate collapses in practice.
• Spending the VAT: the VAT or sales tax you add to your invoice belongs to the tax authority.
• Never raising your rate: costs rise every year; review your rate annually and say so in your terms.

The money, pricing and income section links your rate to your starting capital, your prices and your own pay, and Start a business covers the other steps. If you price projects rather than hours, read set your price, and see tax and bookkeeping for setting money aside. The Firmfocus Advisor can check your assumptions.