How to calculate a billable hourly rate
A billable rate is the amount you invoice for one hour of client work. It has to cover three things: what you want to take home, what the business costs to run, and the fees that come out of every payment, with a profit margin on top if you want one. The catch is the denominator. You cannot invoice every hour you work, so the rate is not your yearly target divided by 2,080. It is the revenue you need divided by the hours you can actually bill.
- Billable hours = working weeks × hours per week × utilization.
- Revenue needed = (owner pay + overhead) ÷ (1 − fee % − profit margin %).
- Hourly rate = revenue needed ÷ billable hours.
- Day rate = hourly rate × invoiceable hours in a day.
The calculator also shows a cost-floor rate, which uses the same formula with a 0% margin: the lowest hourly rate that still pays you, covers overhead and absorbs fees. Everything below that rate loses money in the model. Pay is entered before your personal income tax and sales tax or VAT is ignored, so treat the result as a revenue plan, not take-home pay.
Freelance day rate and non-billable time
Only billable time earns revenue. Proposals, invoicing, admin, learning, marketing and gaps between projects all use working hours that nobody pays for. Utilization is the share of your working hours that you invoice. At 60% utilization a 40-hour week produces 24 billable hours; the other 16 are unpaid work the rate has to carry. Enter weeks after subtracting leave, holidays and sick time, because the calculator does not subtract vacation a second time. To see how many hours you really work and bill, record them with a time card calculator, then use that figure here.
The day rate is the target hourly rate multiplied by the invoiceable hours you assume in one billable day, 8 by default. It is a conversion, not a separate calculation: if you only bill six hours of a day, enter 6 and the day rate falls accordingly. If you are comparing a freelance rate with an employee salary, the salary calculator converts gross pay between hourly, weekly and yearly figures, but it does not add overhead or unpaid time.
Profit margin, platform fees and markup
Fees and margin are both entered as a percentage of revenue, the amount invoiced. That is why the formula divides by (1 − fee − margin) rather than adding to cost. A margin of 20% means profit is one fifth of revenue; it is not the same as a 20% markup on cost. With a cost of 84,000 and no fee, a 20% margin needs 105,000 of revenue, while a 20% markup gives only 100,800. If you think in markup, convert with the margin and markup calculator.
Fees matter more than they look. The default 5% fee raises the target hourly rate from 95.11 to 101.45, and a 10% fee would raise it to 108.70. Use the fee your platform or payment processor really charges, and 0 if clients pay you directly by bank transfer.
Worked example: 46 working weeks and 60% utilization
A freelancer wants 72,000 a year of owner pay, has 12,000 of business overhead, works 46 weeks of 40 hours, bills 60% of them, pays a 5% platform fee and wants a 20% profit margin. Billable hours are 46 × 40 × 60% = 1,104. Revenue needed is (72,000 + 12,000) ÷ (1 − 5% − 20%) = 112,000. The target hourly rate is 112,000 ÷ 1,104 = 101.45, and an 8-hour day is 811.59. The revenue splits into 5,600 of fees and 22,400 of profit on top of the 72,000 pay and the 12,000 overhead, which adds back to exactly 112,000. With no margin, the cost-floor rate is 80.09.
How utilization changes the rate
Utilization is the assumption people overestimate most. In the example, billing only 40% of working hours needs 152.17 per hour, while billing 80% needs 76.09. Same pay, same overhead, same margin: the difference is hours. The table above recomputes the rate at 40%, 60% and 80% with everything else as entered, so you can see how fragile a rate is before you quote it. If your actual utilization is below what you assumed, your real profit margin will be lower than the one you planned.
Assumptions and when to update your rate
This is a cost-plan calculator. It does not know your market, your clients or what they will pay, and it does not recommend a rate. Update it with your real overhead and your observed utilization at least once a year, and whenever fees, costs or your working weeks change. Overhead should exclude your own pay, and the profit margin is extra on top of pay, not a replacement for it. For goods or services sold in units rather than hours, the business break-even calculator works from fixed costs and contribution per unit instead. Estimates are educational, not financial or tax advice; see the disclaimer.
Frequently asked questions
What is a billable rate?
The amount you invoice per client hour, before the platform fees and costs modeled here are taken out of what you receive.
How do I calculate an hourly billing rate?
Divide the revenue you need by your annual billable hours. Revenue needed is owner pay plus overhead, divided by one minus your fee and margin percentages.
Is a billable rate the same as a salary?
No. A billable rate also has to cover overhead, fees and unpaid hours, which is why it is usually much higher than the hourly equivalent of a salary.
How do I convert an hourly rate to a day rate?
Multiply the hourly rate by the invoiceable hours you enter for one day. Eight hours is the default; enter fewer if you rarely bill a full day.
Is a 20% margin the same as a 20% markup?
No. Margin is a share of the price, markup is a share of cost. A 20% margin needs a price 25% above cost; a 20% markup is a price 20% above cost.
Does this calculate take-home pay or market pricing?
No. Personal income tax and what buyers will pay are outside the model. Use the result as a floor and a plan, then compare it with the market.