How to Set Your Freelance Rate: The Floor-Rate Method

Why converting a salary does not work

The most common shortcut is to divide a former salary by about 2,000 working hours. It ignores three realities of working for yourself. You will bill far fewer than 2,000 hours, because selling, admin, learning and gaps between projects take real time. You may now pay tax and social contributions that an employer used to handle, as well as your own equipment, insurance and leave. And you need a margin for slow months.

The floor-rate method works from the bottom up instead. You add up the revenue the business must generate in a year, then divide it by the hours you can realistically bill. The result is not a target or a market rate. It is the line below which a piece of work, once you estimate its hours honestly, costs you money however pleasant the client is.

Step 1: start with the income you need

Begin with the personal income you need after tax for a year, based on your actual living costs plus savings, not on what you hope to earn. Then gross it up for income tax and social contributions at your effective rate. If your effective rate is 30 percent, for example, divide your after-tax figure by 0.70 to find the pre-tax profit the business must make. Multiplying by 1.30 instead is a common mistake that understates the amount.

Tax rules differ by country, and often by region and business structure. Some countries charge flat social contributions, allowances change the effective rate, and value added tax or sales tax rules vary widely. Sales tax you collect from clients is not your income, so leave it out of these figures. Confirm your effective rate with an accountant or your tax authority before relying on it.

Step 2: add business costs and a buffer

Next, add your annual business costs. Use last year’s figures if you have them, and include the small recurring items that are easy to forget. Then add a buffer of at least 10 percent of the total to cover slow months, unpaid leave and savings for retirement, which no employer is now funding for you. The buffer is not optional padding; it is what keeps one quiet quarter from becoming a crisis.

• Software, subscriptions and equipment
• Insurance, accounting and legal fees
• Training, marketing and professional memberships
• Workspace, phone and internet
• Fees charged by platforms and payment providers

Step 3: count your billable hours honestly

Start with 52 weeks and remove holidays, public holidays and a realistic allowance for illness. Then estimate how many hours a week you can actually bill. In a 40-hour week, a common planning assumption is that selling, admin, learning and gaps take 40 to 50 percent, leaving 20 to 24 billable hours. If you have tracked your time for a month or more, use your own figure instead.

Be careful not to plan for a fully booked year. A schedule that only works at full utilisation leaves no room for a client who pays late, a project that overruns or a quiet month, and a floor rate built on that schedule will be too low. It is better to be pleasantly surprised by extra billable hours than to discover in November that the year never added up.

A worked calculation

Here is the method applied to Mira, a fictional freelance copywriter who needs to take home 45,500 euros a year. The figures are in euros, but the arithmetic works in any currency. The 30 percent effective tax rate is purely illustrative, so replace every number, and especially that one, with your own.

Notice that the revenue Mira needs is about 1.7 times her take-home income, and that her real floor is nearly three times the salary-style figure. Both ratios will differ for you, but the gap is usually large enough to change how you quote and which work you accept. Keep the calculation in a spreadsheet so you can rerun it whenever one of the figures changes.

From floor rate to the rate you quote

Your floor is the minimum, not the price. To set the rate you quote, compare it with what clients pay for similar specialists in your market, which you can gauge from peers, professional communities and published rate cards, and with the value the work creates for the client. If the market rate is well above your floor, price closer to the market. If it is below your floor, look for a different niche, client type or service.

For fixed-price projects, estimate the hours, multiply by your personal correction factor, which is the ratio between how long work really takes you and how long you expected, and price at or above the floor. Many freelancers then move towards value-based prices and three-tier proposals, which link the price to the outcome rather than to the clock. Whichever structure you use, convert the quote back into an hourly figure for yourself before you send it.

Review your rate regularly

Recalculate your floor at least once a year, and whenever your costs, tax position or available hours change. Raise rates for new clients first, then give existing clients clear notice before an increase applies to them. If a client relationship only works below your floor, discuss a smaller scope rather than a lower price. If almost every prospect accepts your proposals straight away, treat that as a sign your price may be below what the market will bear. The Pricing & Negotiation for Freelancers course covers value-based pricing, three-tier proposals and scripts for holding your rate.