In more detail
Start from what you want to earn, add business expenses (software, equipment, insurance, accounting), and gross it up for taxes, including self-employment tax where it applies: required revenue = (income + expenses) / (1 − tax rate). Then divide by billable hours, not working hours. Admin, sales, invoicing, holidays and sick days are unpaid, so billable hours are often 50–70% of time worked. An employee's salary also hides benefits such as paid leave and employer pension contributions that a freelancer must fund alone.
Why it matters
Dividing a former salary by 2,080 hours is the classic underpricing mistake: it ignores expenses, the employer's share of taxes and every unbilled hour, so the business looks busy but earns less than the old job.
Example
Target income $60,000, expenses $6,000, and a 25% tax reserve:
- Required revenue:
(60,000 + 6,000) / (1 − 0.25)= $88,000 - Billable time: 48 weeks × 25 hours = 1,200 hours
- Hourly rate: 88,000 / 1,200 = $73.33
- Day rate (8 billable hours): $586.67