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How to Calculate the Income You Actually Need as a Freelancer
An hourly rate answers what to charge per hour. It doesn't answer whether that rate, at your realistic billable hours, actually adds up to enough. Here is the calculation that does.
Setting an hourly rate is only half the calculation. The other half is checking whether that rate, multiplied by the hours a freelancer can realistically bill in a year, covers living costs, business expenses, taxes, and a buffer for slow months. Skipping this second half is how a freelancer can charge what feels like a reasonable rate and still come up short at the end of the year.
Building the target from the ground up
This is the number the freelancer's work actually has to generate, before it's divided by billable hours to check whether the rate and workload combination is realistic.
Required annual revenue = Personal living costs + Business expenses + Estimated taxes + Savings and buffer target
Worked example
That 61,500 is the number to work backwards from, not a starting hourly rate applied forward with an assumed full-time schedule.
| Component | Annual amount |
|---|---|
| Personal living costs | 38,000 |
| Business expenses (software, equipment, insurance) | 4,500 |
| Estimated taxes and self-employment contributions | 13,000 |
| Savings and buffer target | 6,000 |
| Required annual revenue | 61,500 |
Dividing by realistic billable hours, not total working hours
This is the step most new freelancers overestimate. A 40-hour working week is not 40 billable hours; time spent on quoting, admin, invoicing, finding clients and unpaid revisions all reduce the hours that are actually billed to a client. Many independent workers bill somewhere between 55% and 75% of their working time once these are accounted for, and the ratio tends to be lower in the first year or two, before a steady client base is built.
At 32 working hours a week for 46 working weeks a year (allowing for holidays and gaps), and a 65% billable ratio, that's roughly 958 billable hours in the year. Dividing the 61,500 target by 958 gives a required rate of about 64 an hour — a materially different number than dividing the target by 40 hours a week for 52 weeks, which would suggest a much lower and unworkable rate of roughly 30.
What changes the required rate most
The billable ratio is usually the single biggest lever, and it's also the one freelancers most consistently overestimate when starting out, which is why a first-year rate calculation built on an optimistic ratio often needs revisiting a few months in.
| Factor | Effect on required hourly rate |
|---|---|
| Lower billable ratio (more admin, slower client pipeline) | Higher rate needed for the same target |
| Fewer working weeks (more time off, seasonal work) | Higher rate needed |
| Higher personal living costs | Higher rate needed |
| Lower business expenses (leaner setup) | Lower rate needed |
| More clients or referrals reducing unpaid business-development time | Lower rate needed, over time |
Mistakes that set a freelance income target too low
- Setting an hourly rate based on what similar freelancers charge, without checking whether that rate, at your own realistic hours, actually meets your required annual revenue.
- Using total working hours instead of billable hours when converting the annual target into an hourly rate.
- Forgetting to include an allowance for unpaid time off, since freelancers don't have paid leave the way employees typically do.
- Underestimating taxes and required contributions, which are often higher as a share of income for self-employed work than for equivalent employed income once self-employment-specific contributions are included.
Building in room for growth, not just survival
The calculation above produces a target that covers costs and a basic buffer, which is a reasonable starting point but leaves little room for reinvestment — upgrading equipment, taking a course, or absorbing a genuinely slow quarter without financial strain. Many freelancers find it useful to calculate a second, slightly higher target that includes a specific reinvestment or growth allowance, treated as a separate line item rather than folded into the general buffer.
Having both numbers — the minimum required revenue and a growth-inclusive target — gives a clearer sense of whether a quiet month is a genuine problem or simply below the second, more ambitious target while still comfortably above the first.
Base the income target on billable capacity
The most common planning error is dividing a desired annual income by every hour you could possibly work. Sales, administration, proposals, learning, holidays and gaps between projects reduce billable capacity. A better model makes those non-billable hours visible and then tests whether the resulting required rate is realistic for the market you serve.
Frequently asked questions
What billable ratio should I use if I'm just starting out?
A conservative one, often toward the lower end of the typical range, since building a client pipeline and getting comfortable with the business side of freelancing both take real, unbillable time in the early period.
Should I include health insurance and retirement savings in required living costs?
Yes, since these are typically employer-provided for salaried workers and become a direct personal cost for a freelancer, and leaving them out understates what freelance income actually needs to cover.
How often should I revisit this calculation?
At least once a year, and sooner if a major cost changes or if actual billable hours are turning out consistently different from what was assumed when the rate was first set.
Is a higher hourly rate always better?
Only if the market will actually pay it. A rate calculated correctly from your target and hours is a floor to negotiate from, not a guarantee that clients will accept it — the market-rate check matters as much here as it does in general pricing.
Why are billable hours lower than total working hours?
Freelancers spend time on administration, sales, communication, planning, learning, invoicing and other work that may not be directly billable.
Should taxes be included in a freelance income target?
If the target is an amount you need to keep after tax, the model should account for the relevant tax and business-cost assumptions. Those rules vary by jurisdiction.
Conclusion
A freelance income target starts with what the work actually needs to cover — living costs, business expenses, taxes and a buffer — and divides that by a realistic count of billable hours, not total working hours. The billable ratio is where most first-time calculations go wrong, and revisiting it against actual experience after a few months is what turns an initial estimate into a number that holds up.
Try the Freelancer Hourly Rate Calculator to apply this to your own figures.
Figures in this article are illustrative. Results depend on your own rates, fees, taxes and circumstances, and are for educational and planning purposes rather than financial advice.