Why your old salary divided by 2,080 is the wrong number
It is the first calculation everybody does, and it is wrong in four separate directions at once. 2,080 hours is 40 hours times 52 weeks, and it quietly assumes you are paid for every one of them. As an employee you were. As a freelancer you are not paid for the fortnight you spend in Spain, or the week you have flu, or the public holidays, or the Tuesday afternoon you spend writing a proposal that does not land.
Then there is the tax. An employee pays half of Social Security and Medicare and never sees the other half, because the employer pays it. A freelancer pays both halves, which is what self-employment tax is. And the health insurance and retirement contributions that used to arrive invisibly are now invoices with your name on them.
Add all four up and the honest rate is usually somewhere around two and a half times the naive one. That is not a markup and it is not cheek. It is what it costs to replace the same income.
The formula
profit needed = target income, grossed up for self-employment tax
rate = (profit + expenses) ÷ billable hours
Self-employment tax is 15.3% charged on 92.35% of net profit, which comes to about 14.1% of profit. The Social Security part stops at the annual wage base; the Medicare part has no ceiling. That 92.35% is not a discount someone was kind enough to give you: it removes the employer half from the base, so you are not taxed on your own employer contribution.
Worked example
You want to pay yourself $100,000, plus $12,000 of benefits you now buy yourself. Business expenses $6,000. You take 6 weeks off, work 40 hours a week, and bill 60% of them.
Weeks you can sell: 52 − 6 = 46, which is 1,840 hours.
Billable hours: 1,840 × 60% = 1,104. The other 736 hours are real work that earns nothing directly.
You need $112,000 in your hands, so profit has to be $130,429 after $18,429 of self-employment tax. Add $6,000 of expenses and you must bill $136,429.
$136,429 ÷ 1,104 = $123.58 an hour, or $989 a day.
The naive figure was $100,000 ÷ 2,080 = $48.08. The honest rate is 2.6 times that.
The lever nobody pulls
Everyone reaches for the tax line first, because it is the one that feels unfair. But self-employment tax is a fixed percentage and there is nothing to negotiate. The number that genuinely moves your rate is the billable share, and it is the one almost nobody measures.
| Billable share | Billable hours | Rate you need |
|---|---|---|
| 40% | 736 | $185.37 |
| 50% | 920 | $148.29 |
| 60% | 1,104 | $123.58 |
| 70% | 1,288 | $105.92 |
| 80% | 1,472 | $92.68 |
Moving from 50% to 70% billable takes the rate you need from $148.29 down to $105.92, a fall of nearly a third, and it is the same amount of your life either way. Nothing else on this page comes close to that. If you measure one thing this year, measure where your hours actually go, because the answer usually surprises people and it is the only input here you have real control over.
Worth saying clearly: the unbilled hours are not waste. Finding the next client and invoicing the last one are what keep the business alive, and a freelancer at 95% billable is usually one who has stopped selling and is about to find that out. The goal is to know the number, not to drive it to 100.
A rate is not a price
This page answers one question honestly: what you need to charge to reach the income you asked for. That is a completely different question from what your market will actually pay, and it is important not to confuse the two.
If the rate here comes out well above what clients in your field pay, that is genuinely useful information rather than a fault in either number. It means the gap has to close somewhere: fewer unbilled hours, a different kind of client, higher-value work, or pricing by the project rather than the hour. What it should not mean is quietly accepting a rate that does not cover your year and hoping volume makes up the difference, because volume is exactly what you do not have spare.
One more thing worth knowing about hourly pricing: it charges you for getting better. If a job that took you ten hours last year takes four now, an hourly rate cuts your pay for the improvement. Use the number here as your floor, then price the work on what it is worth to the person buying it. And remember income tax is still to come out of the last row; this page deliberately stops before guessing at that, because your filing status, deductions and state make it a different calculation for everybody.