What is a Billable Hourly Rate and How to Calculate It
A billable hourly rate is the amount of money a freelancer or service provider charges their client for each hour of work performed. This rate is crucial for ensuring that your business is profitable, sustainable, and compensates you fairly for your time, expertise, and overhead costs.
Calculating your billable hourly rate accurately involves considering several key factors beyond just wanting to earn a certain amount per hour. You need to account for your desired income, business expenses, non-billable hours, and profit margins. Here's a breakdown of the components:
Components of Your Billable Hourly Rate:
- Desired Salary/Income: This is the amount you want to earn for yourself after all business expenses are paid.
- Business Expenses (Overhead): These are the costs associated with running your business, such as software subscriptions, office rent, insurance, marketing, equipment, professional development, etc.
- Non-Billable Hours: Not every hour you work is directly billable to a client. This includes time spent on administration, marketing, client acquisition, networking, training, and other essential business tasks.
- Profit Margin: This is the extra amount you add to cover unforeseen expenses, reinvest in your business, or as a buffer against slow periods.
The Calculation Formula
A common and effective formula to calculate your billable hourly rate is:
Billable Hourly Rate = (Total Annual Expenses + Desired Annual Income + Annual Profit) / Total Annual Billable Hours
Let's break this down further:
- Total Annual Expenses: Sum of all your business operating costs for the year.
- Desired Annual Income: Your target personal income for the year.
- Annual Profit: A percentage of your income or expenses that you aim to add as profit.
- Total Annual Billable Hours: The estimated number of hours you can realistically bill to clients in a year.
How to Estimate Your Annual Billable Hours:
A standard work year has about 2080 hours (40 hours/week * 52 weeks). However, you need to subtract time for holidays, vacation, sick days, and importantly, non-billable work.
A common estimate is that freelancers can only bill 50-70% of their total working hours. So, if you work 40 hours a week:
- Total Working Hours = 40 hours/week * 52 weeks = 2080 hours/year
- Subtract Holidays/Vacation/Sick Days (e.g., 4 weeks = 160 hours) = 1920 hours
- Subtract Non-Billable Time (e.g., 20 hours/week for admin, marketing, etc. = 1040 hours/year)
- Estimated Billable Hours = 1920 – 1040 = 880 hours/year
This example shows how few hours might actually be billable. It's crucial to be realistic to set a rate that covers your needs.
Putting It All Together with the Calculator
Use the calculator below to input your specific financial figures and estimated billable hours. This will help you arrive at a professional and profitable hourly rate.