How to work out what you actually earn per hour
A freelance rate and a freelance income are different things. The rate applies only to hours a client agrees to pay for, and those are a fraction of the hours the business consumes. Proposals, invoicing, chasing late payment, client calls that go nowhere, admin, marketing and learning are all real working hours that no one is billed for, and they dilute the headline rate substantially.
Then there are the costs an employer used to absorb invisibly: software licences, hardware, insurance, accounting, workspace, training, and the paid leave and sick days that no longer exist. All of it now comes out of the same billings. Whatever survives those costs is profit, and profit is what tax is assessed on — not the amount on the invoice.
Irregular income compounds the problem. Two strong months followed by a quiet one is normal, so a freelancer needs both a tax reserve held separately and a cash buffer sized against the worst realistic gap between payments. Spending a good month as though it were the new baseline is the most common way a profitable freelance business runs out of money.
Worked example
A freelancer working 40 hours a week for 48 weeks a year, billing 60% of that time at 2,000 an hour, carrying 3,00,000 in annual business costs, and setting aside an assumed 30% of profit for tax. The billable share and the set-aside are assumptions for illustration — measure your own utilisation and confirm your own tax position.
| Input | Value |
|---|
| Hours worked per year | 1,920 (40 x 48 weeks) |
| Billable share | 60%, or 1,152 hours |
| Headline rate | 2,000 per hour |
| Gross billings | 23,04,000 |
| Less: business costs | 3,00,000 |
| Profit before tax | 20,04,000 |
| Less: tax set aside | 6,01,200 |
| Kept after costs and tax | 14,02,800 |
| Effective rate per hour worked | 731 |
The rate on the invoice is 2,000, but what survives to the freelancer is about 731 per hour worked — roughly 36.5% of it. Unbillable time alone pulls the figure down to 1,200 before a single cost is paid. This is why a freelance rate has to sit well above the hourly equivalent of a salary offering the same net income: the salaried figure already has the employer's costs, the unpaid admin, the paid leave and the withheld tax stripped out of it.
How to use this calculator
- Count every hour the business consumes in a year, not just the hours that appear on invoices.
- Be honest about the billable share — track it for a month rather than estimating it optimistically.
- Add every business cost, converting annual licences and insurance into the same yearly total.
- Set the tax reserve to a rate confirmed for your own situation, and move it to a separate account as each invoice clears.
- Compare the resulting effective rate against what an equivalent salaried role pays per hour worked.
Frequently asked questions
What billable percentage is realistic?
It depends heavily on the work and on how much of the pipeline you manage yourself. Long retained engagements push it up; short projects won through repeated pitching push it down hard. The only reliable answer is your own measured figure — track hours for a month before assuming anything.
How much should I set aside for tax?
There is no universal percentage, and quoting one would be wrong for most readers. Freelance income is usually taxed on profit rather than billings, often with advance or quarterly payment obligations. Get the rate and the schedule for your own jurisdiction, then reserve on the high side and correct at filing.
Why must a freelance rate exceed the hourly equivalent of a salary?
Because a salary is a net figure sitting on top of costs the employer pays invisibly: retirement contributions, insurance, equipment, paid leave, sick days and the hours you are paid for but not producing. A freelance rate has to cover all of that plus unbillable time, out of billable hours only.
How do I handle income that varies month to month?
Pay yourself a fixed monthly amount from a business account rather than drawing whatever came in. Set it at a level a below-average month can sustain, let the surplus from strong months accumulate, and treat the buffer as working capital rather than as profit available to spend.
Should I bill for proposals, revisions and client calls?
Directly, often not — but they must be priced in somewhere. Either build the expected unbillable time into the rate, or quote fixed project fees that already account for it. Charging a rate calculated only against pure production time systematically undercharges for the actual work.
How do I raise my rate without losing every client?
Raise it for new clients first, so the market tests the number before your income depends on it. Give existing clients notice and a date rather than a surprise invoice. Expect to lose some — losing the lowest-paying ones while the rate rises usually leaves total income flat or higher.
This calculator is an educational tool. Results are estimates based on the inputs you provide and do not constitute financial advice. Verify figures with your bank, broker or a qualified advisor before acting on them.