FREE PREVIEW · MODULE 1 · LESSON 1 · 15 MIN
Calculating your true hourly floor
Why dividing your old salary by 2,000 hours is wrong, and the formula that replaces it.
A very common freelance pricing mistake is converting a former salary into an hourly rate by dividing by roughly 2,000 working hours. That ignores three realities: you will bill far fewer than 2,000 hours, you may now pay social contributions an employer used to cover plus your own benefits, and you need a margin for slow months. For example, a designer who earned 70,000 dollars employed and quotes 35 dollars an hour would gross only about 35,000 dollars at a realistic 1,000 billable hours, before costs and tax.
Build the floor from the bottom up. Start with the annual income you need to live on, say 70,000 dollars. Add income tax and social contributions at your effective rate; rules differ by country, so confirm yours with an accountant, but this example assumes 25 to 35 percent of gross, giving around 95,000 to 105,000 dollars. Add business costs: software, equipment, insurance, accounting, marketing, say 8,000 to 15,000 dollars. Add a buffer for retirement and unpaid leave of at least 10 percent. The total gross revenue required lands near 120,000 dollars. That is the number your billable hours must generate.
Now count billable hours honestly. From 52 weeks remove five for holidays and two for illness, leaving 45. Of a 40-hour week, a common planning assumption is that selling, admin, learning and gaps consume 40 to 50 percent, so 20 to 24 billable hours, or roughly 1,000 a year. Divide 120,000 by 1,000 and the floor is 120 dollars an hour, more than three times the naive figure. This is a floor, not a target. Any project priced below it, once you estimate the hours honestly, loses you money regardless of how nice the client is.
Example: a Toronto developer rebuilds her rate from the bottom up
Priya, a front-end developer in Toronto, left an 85,000 CAD salaried job and started quoting 45 CAD an hour, roughly her old salary divided by 2,000. Then she rebuilt the number. She needs 80,000 CAD a year to live on. Grossing that up for income tax and self-employed pension contributions at about 30 percent gives 114,300 CAD. Software, a laptop fund, insurance, an accountant and a coworking desk add 12,000 CAD, and a 10 percent buffer for retirement and unpaid leave brings the total to about 139,000 CAD. For hours she assumed 45 working weeks of 22 billable hours: 990 a year. Dividing 139,000 by 990 gives a floor of 140 CAD an hour, three times her old quote. A week later she declined a 3,000 CAD project she had estimated at 40 hours, because it worked out at 75 CAD an hour.
Illustrative example: the business, people and figures are fictional.Key takeaways
- Salary divided by 2,000 ignores tax, benefits, costs and unbilled time
- In the worked example, required gross revenue is about 1.7 times the income needed
- Around 1,000 billable hours a year is a sensible planning assumption; divide to get the floor
Exercise
Calculate your own floor with your real figures: income needed, tax rate, business costs, buffer, and an honest count of billable hours. Write the resulting hourly floor at the top of your pricing notes.
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