How to set your hourly rate
Your rate is not what an employee earns: it has to pay your costs, your taxes and the hours you cannot bill. Here is the arithmetic.
The formula
Hourly rate = (what you want to earn in a year + your business costs in a year) ÷ the hours you can really bill in a year.
The hours you bill are fewer than the hours you work: driving, quoting, buying material and waiting are not billed. Count them with your own numbers, for example the weeks you work in a year times the billable hours of each week.
An example with made-up numbers
These numbers are not a recommendation; they only show the arithmetic. Replace them with yours.
- What you want to earn in a year: $60,000.00
- Business costs in a year: $12,000.00
- Weeks you work in a year: 46
- Billable hours a week: 30
- Billable hours in a year: 1,380
- Hourly rate: $52.17 an hour
Taxes for people who work for themselves
People who work for themselves pay self-employment tax: 12.4% for Social Security plus 2.9% for Medicare, 15.3% in all. You usually must pay it if your net earnings from self-employment are $400 or more (IRS, Topic no. 554).
When you work out what you need to earn, think about what is left after taxes and leave that room in the arithmetic. To know how much to pay, talk to an accountant.
Compare with what employers pay
The U.S. Department of Labor publishes the hourly wage employers pay in each trade and state. It is a reference point, not a price: your rate also covers overhead and profit.