How the hourly rate is calculated
The calculator adds target owner pay, operating expenses, benefits, and retirement funding. It divides that cost target by one minus the desired profit margin to find required annual revenue. Your schedule is then reduced by non-billable time, and required revenue is divided by the remaining billable hours.
Revenue target = Annual cost target ÷ (1 − Profit margin)
Billable hours = Scheduled hours × (1 − Non-billable percentage)
Hourly rate = Revenue target ÷ Billable hours
Choosing realistic assumptions
Use working weeks rather than all 52 weeks so vacation, holidays, sick days, and downtime are visible. Estimate non-billable time from actual calendars or time tracking when possible. Review annual expenses using recent statements and include irregular replacements and professional services.
Important limitations
- Excludes personal income tax, self-employment tax, sales tax, currency conversion, platform fees not entered as expenses, and late or uncollectible invoices.
- Assumes one average hourly rate and steady utilization; seasonal or project-based businesses may require a larger reserve.
- Profit margin here is a business reserve after the entered pay and costs, not a guaranteed accounting profit.
Frequently asked questions
Why not divide salary by 2,080 hours?
Independent workers rarely bill every working hour and must fund their own benefits, retirement, overhead, sales time, leave, and business reserves. Dividing salary alone by 2,080 omits those costs.
What counts as non-billable time?
Business development, proposals, invoicing, bookkeeping, training, internal meetings, marketing, and unpaid revisions are common examples.
Should I charge exactly the calculated rate?
Treat it as a financial floor under your assumptions. Market demand, specialization, urgency, project risk, scope uncertainty, and value to the client may support a higher price.
Does the result include taxes?
No. The target pay is pre-tax compensation, and the result excludes personal income and self-employment taxes. Build a separate tax reserve appropriate to your situation.