Contractor Hourly Rate Calculator
Your Target Hourly Rate:
Annual Billable Hours:
Total Gross Revenue Required:
How to Calculate Your Contractor Hourly Rate
Transitioning from a salaried employee to an independent contractor or freelancer is an exciting move, but many professionals make the mistake of simply dividing their previous salary by 2,080 (the standard working hours in a year). This approach often leads to financial struggle because it fails to account for taxes, overhead, and non-billable time.
The Components of a Professional Rate
To ensure your business is profitable and sustainable, you must account for these three primary factors:
- The "Salary" Goal: This is the net amount you want to take home to cover your personal living expenses and savings.
- Business Overhead: Unlike employees, contractors pay for their own laptops, software licenses, health insurance, office space, and marketing.
- The Tax Gap: You are responsible for both the employer and employee portions of social security and medicare (self-employment tax), plus standard income tax.
Understanding Billable vs. Non-Billable Hours
A major pitfall for new contractors is assuming they will work 40 billable hours every week. In reality, you will spend a significant portion of your week on "admin" tasks: prospecting for new clients, sending invoices, managing your website, and continuous learning. Most successful contractors find that their billable hours hover between 20 and 30 per week.
The Formula Used in This Calculator
Our calculator uses a comprehensive formula to ensure you don't undercharge:
- Calculate Working Weeks: 52 weeks minus your vacation and sick days.
- Calculate Total Billable Hours: Multiply working weeks by your billable hours per week.
- Calculate Required Gross Revenue: We add your desired income to your expenses, then adjust upward to account for your tax percentage.
- Final Rate: Divide the Gross Revenue by the Total Billable Hours.
Example Calculation
Imagine you want a $100,000 take-home income. You have $10,000 in annual expenses and face a 30% total tax burden. You want 4 weeks of vacation and plan to bill 25 hours per week.
- Total Revenue Needed: ($100k + $10k) / 0.70 = $157,142.
- Billable Hours: 48 weeks × 25 hours = 1,200 hours.
- Hourly Rate: $157,142 / 1,200 = $130.95 per hour.
By using this structured approach, you ensure that every hour you work contributes to your business growth, your taxes, and your personal financial freedom.