Start with the income you want to keep
Decide what you want to take home in a year. That is the number your household needs after business costs, not before. If you are replacing a job, remember that your old salary hid costs that an employer paid, such as part of payroll taxes, equipment, software and often health insurance.
Write the target down as one annual number, then keep it separate from the expenses you will add next.
Add business expenses
List what the business costs to run each year: software, equipment, insurance, a workspace, professional fees, marketing and the accountant. Include things you buy once and use for years by spreading them out.
This total is not income for you. It is money that goes out before you take anything home, so it must be recovered in your rate.
Set aside for taxes, benefits and savings
Freelancers pay their own self-employment taxes and income taxes, buy their own health coverage and fund their own retirement. Pick a set-aside percentage for these. A tax preparer can help you choose one that fits your situation, since it depends on income, location and filing status.
Divide income plus expenses by one minus that percentage. With a 30% set-aside, you need to bill about 1.43 dollars for every dollar you want to keep or spend.
Count only billable hours
Subtract weeks for vacation, holidays and sick time. Then estimate how many hours a week you can actually bill. Finding clients, sending invoices, email, learning new tools and bookkeeping are real work, but nobody pays for them. Many freelancers find that 20 to 30 billable hours is a realistic week, even when they work much longer.
Divide the revenue you need by billable hours a year. The result is your minimum hourly rate.
A worked example
Say you want to take home $70,000, expect $6,000 of business costs, and set aside 30% for taxes and benefits. You need to bring in $76,000 divided by 0.70, or about $108,600. You take four weeks off and can bill 25 hours in each of the other 48 weeks, which is 1,200 hours. Your minimum rate is about $90 an hour.
If that number feels impossible for your market, the lesson is not to give up your costs. It is to raise billable hours, lower expenses or change what you sell.
Reality checks
Compare the number to what clients in your field pay, and add a cushion for slow months and late payers. If the rate looks too high for your market, you have three levers: cut expenses, raise billable hours by finding better clients, or move to project pricing where fast work earns more.
Revisit the rate every year. Your costs and skills change, and a rate set once is usually out of date within a year or two.
Common questions
Should I charge hourly or per project?
Both work. Hourly is simple when scope is unclear. Per-project pricing rewards you for being fast, as long as you set the scope carefully. Use your hourly rate to price the project.
How many billable hours should I assume?
Be conservative. Track your time for a few weeks to see how many hours you really bill, then use that number.
Do I need to charge sales tax?
It depends on what you sell and where your customers are. Check with your state tax agency or a tax preparer.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.