Step 1: Required Gross Income
Gross = (Target Income + Expenses) / (1 - Tax Rate)
Your gross must cover take-home pay, business expenses, AND taxes on the full amount.
Step 2: Billable Hours Per Year
Hours = (52 - Vacation Weeks) x Billable Hrs/Week x Utilization Rate
Utilization accounts for time spent on admin, marketing, invoicing, and unbillable work.
Step 3: Hourly Rate
Hourly Rate = Required Gross Income / Total Billable Hours
This is the minimum you should charge to meet your income goals. Consider rounding up for negotiation buffer.
Pro Tips for Setting Freelance Rates
- Round your hourly rate up to the nearest $5 or $10 for clean pricing
- New freelancers often underestimate expenses by 20-30%
- Track your actual utilization rate for 3 months to get accurate data
- Consider value-based pricing for high-impact projects instead of hourly
- Review and increase your rates annually to account for inflation and growing expertise