Your freelance rate has to cover three things a salary hides: your business expenses, your self-employment tax, and the hours you work but can't bill. The formula is:
Hourly rate = (target take-home + annual business expenses + self-employment tax) ÷ billable hours per year
Dividing a desired salary by 2,080 hours is the classic mistake — it assumes no costs, no payroll tax of your own, and that every working hour gets invoiced.
👉 Freelance Rate Calculator runs the full formula and shows the working (hourly rate, day rate, annual invoiced total, and how much of the rate is tax vs expenses).
The four terms
- Target take-home — what you actually keep. Usually the only term people get right.
- Business expenses — every cost of being in business. A rate that ignores them means clients get your software subscriptions for free.
- Self-employment tax — an employer used to pay half your Social Security and Medicare. Nobody pays that half for you now. For a US sole proprietor: 15.3% on 92.35% of net profit (12.4% Social Security up to the 2026 wage base of $184,500, plus 2.9% Medicare with no cap). Source: IRS Schedule SE; SSA 2026 COLA fact sheet.
- Billable hours — not hours worked. Pitching, admin, invoicing, chasing late payment and unpaid revisions are real hours nobody pays for, and time off is unpaid.
Worked example
Someone needing $70,000 take-home, spending $8,000 a year on the business, billing 25 hours/week × 46 weeks (1,150 hours), with a 10% buffer:
| Step | Result |
|---|---|
| Net profit needed before SE tax | $81,518 |
| Self-employment tax | $11,518 |
| Plus business expenses | $89,518 |
| Plus 10% buffer | $98,470 |
| ÷ 1,150 billable hours | $85.63/hr (≈ $685/day) |
The naive calculation — $70,000 ÷ 2,080 — gives $33.65/hr. The gap isn't ambition; it's tax, costs, and unpaid hours.
The input people get wrong
Three of the four terms are decisions. One is a fact you have to look up — and most people estimate annual expenses from memory and land low. The usual misses are recurring: software subscriptions, platform and payment-processor fees, hardware replacement, the home-office share, insurance and accounting fees.
ExpenseBot captures those receipts out of Gmail into a Google Sheet in your own Google Drive, so "annual business expenses" is a number you read off a spreadsheet instead of one you invent. That's a historical total of money already spent, used once to set a rate — not a forecast or a budget.
Related
- Setting a price is this entry. Deciding what to draw from money you've already earned is a different question — see How much should I pay myself when I'm self-employed?
- The 15.3% line on its own: Self-Employment Tax Calculator
- The home-office share of your expenses: Home Office Deduction Calculator
Estimates — confirm with your tax professional. The calculator covers US self-employment tax only; income tax depends on your bracket and is not included.