The Hourly Rate Formula for Freelancers: Include Every Cost

You have an hourly rate. But do you know how it came about? For many self-employed people, it simply emerged at some point: from what the first client accepted, from a glance at a forum, or from a gut feeling that "this is about what you can charge".

The problem usually only shows up after a year or two – when the first tax back-payment lands, when holidays suddenly cost money, or when a full month still leaves nothing over.

The good news: the formula for a sustainable hourly rate isn't complicated. The work lies in carefully collecting everything that belongs at the top of it.

The formula in one sentence

Hourly rate = total annual requirement ÷ billable hours per year

That's all there is to it. Everything else is detail within those two figures.

The total annual requirement is the amount your business has to earn net in a year so that everything is covered: operating costs, your living expenses, insurance and pension contributions, taxes and a buffer.

Billable hours are the hours you can actually invoice – not the hours you work.

The most common mistake sits in both figures at once: the requirement is estimated too low, the billable hours too high. Both push in the same direction – in example calculations, the rate arrived at this way is well below the figure that would actually be needed. Further down you'll see, in concrete numbers, just how large that gap can get.

The "salary divided by 160" fallacy

Many people start like this: "I'd like €4,000 a month, so €4,000 ÷ 160 hours = €25 per hour."

This calculation ignores four things: you pay your health insurance and pension contributions on your own. You pay income tax on your profit. You have operating costs. And you can't bill 160 hours a month, because proposals, bookkeeping, sales and training take time too.

Step 1: Build up the total annual requirement

Calculate from the bottom up – from private life to revenue.

Building block 1: Operating costs

Everything your business costs over a year, regardless of whether you currently have a project:

• Office, home office, rent or a proportional share of costs
• Software, licences, hosting, phone, internet
• Insurance (professional liability, legal expenses)
• Tax advice, bank charges, membership fees
• Training, professional literature
• Hardware and depreciation
• Marketing, website, travel costs

Take the figures from your last management report or income-surplus statement and project them across the year. It's better to estimate a little generously.

Building block 2: Owner's salary

This is the amount you need privately each month: rent, food, insurance, mobility, leisure, savings for larger purchases. Not the bare minimum, but the amount you can live on long term.

How to derive this figure methodically is covered in detail in the article Calculating Your Owner's Salary.

Building block 3: Insurance and pension

Health and long-term care insurance, retirement provision, and disability cover where relevant. As a self-employed person you carry these contributions entirely yourself. They belong in your calculation, not in the "I'll deal with that later" category.

Building block 4: Taxes

Income tax (and, depending on your legal form, other taxes) applies to profit, not revenue. For your calculation you work with a reserve rate – 25% to 35% is often used. The exact figure depends on your personal situation.

Important: you don't simply add taxes on top, you gross the requirement up. If you need €50,000 net and assume 30% tax, you need €50,000 ÷ 0.7 = €71,429 in pre-tax profit.

VAT stays out of this calculation. It's a pass-through item and never belongs to you – more on that in VAT Reserve. Your hourly rate is always a net rate.

Building block 5: Profit and risk buffer

A business that comes out at exactly zero isn't stable. Add 5% to 15% for investments, bad debts, weak months and reserves.

Step 2: Estimate billable hours realistically

This is where it's decided whether your hourly rate holds up.

Calculate it like this:

1. 52 weeks minus holiday minus estimated sick days and training days
2. times your weekly working hours → working hours per year
3. times your realistic utilisation rate → billable hours

For most solo self-employed people, the utilisation rate is well below 100%. Writing proposals, issuing invoices, bookkeeping, sales, networking, the website, initial calls – all of that is work, but none of it is a paid hour. The article on billable hours per year shows how to arrive at a robust figure.

If you're unsure: be conservative. An over-optimistic utilisation rate is the most common reason for hourly rates that don't stretch far enough in everyday life.

A worked example (illustrative figures)

A self-employed consultant, sole trader, works 40 hours a week.

Private requirement:

Grossing up to pre-tax profit with a 30% tax reserve: €52,800 ÷ 0.7 = €75,429

For simplicity, the entire net requirement is grossed up here; tax deductibility – for pension and insurance contributions, for example – is left out of the example. Operating costs are also added only after the gross-up in this example. That makes the calculation easier to follow and tends to err on the cautious side.

Plus operating costs:

• Software, hosting, phone: €2,400
• Insurance: €900
• Tax advice: €1,800
• Training and professional literature: €1,500
• Workspace, hardware, other: €3,000
• Total: €9,600

€75,429 + €9,600 = €85,029

Plus a 5% buffer: €85,029 × 1.05 = roughly €89,300 total annual requirement.

Billable hours:

• 52 weeks − 6 weeks holiday − 1 week sickness/training = 45 working weeks
• 45 × 40 hours = 1,800 working hours
• Utilisation 55% → 990 billable hours

Hourly rate: €89,300 ÷ 990 h = €90.20 → rounded to €90 net per hour.

For comparison: the naive calculation "€4,400 ÷ 160 hours" would have produced €27.50. The difference isn't greed, it's reality.

These figures are a worked example, not a recommendation. What your actual tax rate turns out to be is something to clarify with your tax advisor – THA·ONE is a planning aid, not tax advice within the meaning of the German Tax Advisory Act (StBerG).

Common mistakes in the formula

Holiday and sickness are missing

If you calculate with 52 weeks, you're setting an hourly rate for a year without breaks. That year doesn't exist.

Taxes are added instead of grossed up

30% of €52,800 is €15,840. The correct gross-up, however, produces a tax share of €22,629. The difference is almost €7,000 per year.

Unpaid work is ignored

Proposals, kick-offs, documentation, rework: if you don't account for this time in your utilisation rate, you're doing it for free.

The rate is never reviewed

Costs rise, workloads change. Recalculate once a year – and after large projects, run a post-calculation to check whether you actually achieved the rate you calculated. All you need are two figures: the actual fee and the hours actually spent.

What if the figure looks too high?

It can happen that the formula spits out a rate you can't initially achieve in the market. Then you have three honest levers:

1. Reduce costs – usually the smallest lever, but a real one.
2. Increase utilisation – streamline processes, less unpaid side work, a better proposal win rate.
3. Increase value – specialisation, outcome orientation, package prices instead of hourly billing.

What you shouldn't do: talk your requirement down so the number fits. The requirement doesn't disappear that way, it just becomes visible later – as a tax back-payment or an empty account.

If you want to run the numbers quickly, the hourly rate calculator helps. For the full calculation including package prices, there's a dedicated tool.

Conclusion

The formula for your hourly rate is simple: total requirement divided by billable hours. What matters is the care you take with the building blocks – operating costs, owner's salary, insurance and pension, taxes and a buffer all belong in there, and billable hours are almost always fewer than you'd think.

Work through the rate once, calmly, write down your assumptions and review them each year. Then you're no longer negotiating on gut feeling – you know your floor, and you know exactly when a project stops being worth it.