Hourly rate calculator

Why dividing a salary by 2,080 gives the wrong answer

It is the first calculation everybody does. You want the equivalent of a $60,000 salary, there are 2,080 working hours in a year, so you charge about $29 an hour. Then the year ends and there is nothing left.

Three things went missing, and all three push the same way. Not every worked hour is billable: proposals, invoicing, chasing payment, admin, marketing and the call that did not become a project are all worked and none of them are paid. Nobody pays for your time off, so a year of billing is shorter than a calendar year by however long you are away. And costs and tax come out of the invoice, not out of some other pot: software, insurance, hardware and an accountant are paid before anything reaches you.

So this runs the calculation backwards. Start from what you want to keep, add the tax on it, add what the business costs to run, and divide by the hours you can genuinely invoice.

The worked example

Take $60,000 of take-home pay, $6,000 of yearly business costs and an effective tax rate of 20%, worked at 40 hours a week with 2 weeks off and 60% of the week billable.

• 50 working weeks × 40 hours = 2,000 hours at work
• 60% of those = 1,200 billable hours
• $60,000 after 20% tax needs $75,000 before it
• plus $6,000 of costs = $81,000 to invoice
• $81,000 ÷ 1,200 = $67.50 an hour

Note what the last two steps do. The tax is added by dividing by 0.8, not by taking 20% off, taking 20% off $60,000 gives $48,000 and leaves you short. And the costs go in after that, because business costs are deducted before tax nearly everywhere, so they are not themselves taxed.

The billable share is the number that matters

Everything else on this page moves the answer a little. The billable share moves it a lot: halving it doubles the rate exactly. At 60% billable the example needs $67.50 an hour; if every hour could be billed, the same year would be funded at $40.50.

Most freelancers land between 50% and 75%, and almost everyone guesses high. The honest way to find your own is to look back at a few months of invoices and divide the hours you charged for by the hours you worked. New freelancers are usually much lower than they expect, because winning work takes about as long as doing it.

A rate is not a wage

In the example, $67.50 an hour leaves $50 of take-home per billed hour once tax and costs are met. The table above the questions splits it out. This is worth having to hand when a rate is described as expensive next to a salary: one is revenue and the other is income, and comparing them directly is comparing a shop’s takings to its owner’s pay.

It also explains why the freelance rate for a job is several times the hourly cost of an employee doing the same work and is not necessarily better paid.

What this does not include

Pension contributions, health cover, paid parental leave and sick pay are all things a salary carries invisibly. None of them are added here. If you want them, put the yearly cost into business costs or into the take-home figure you are aiming for.

Neither is anything modelled for invoices paid late, work that does not come in, a rate that changes mid-year, or tax that is banded rather than flat. The result is an estimate built on the figures you entered and holds only as long as they do. It is a floor to check a quote against, not a price and not tax advice.