How to Start
a Business

A practical guide

How to set your hourly rate

Add the income you want to take home and your yearly business costs, then divide by the hours you can realistically bill in a year, which is far fewer than the hours you work.

Published November 3, 2026 · Luke F. Walton

Your hourly rate is the money you need from clients in a year, divided by the hours you can bill them for. The money you need is the income you want to take home plus what the business costs to run. The hours you can bill are a fraction of the hours you work.

The common mistake is dividing by every hour in the workweek. To run your own numbers while you read, use the hourly rate calculator.

What is the formula for an hourly rate?

Hourly rate = (target income + yearly business costs) ÷ billable hours per year.

Billable hours per year = weeks worked × hours per week × billable share.

Target income here means what you want to take home each year before tax. Yearly costs are what the business spends to run. Billable share is the portion of your working hours you can charge a client for. The calculator takes those five inputs and returns billable hours, the hourly rate, and a day rate at 8 hours.

A worked example for a laptop consulting practice

Say you run a consulting practice from a laptop. These inputs are an example, not a typical case:

Now the arithmetic, line by line:

You would round to $75 an hour, or about $590 a day. Rounding up is fine. Rounding down quietly lowers your income.

What changes when billable share drops

Suppose the same practice is new, and only 50 percent of your hours get billed. Selling takes more time when you have few clients.

The rate went from $73.66 to $103.13 with nothing else changed. The income target, the costs, and the weeks are the same. Fewer billable hours have to carry the same $99,000. If you priced at $73.66 and billed half your hours, you would collect about $70,714 (960 × $73.66) and fall about $28,000 short of the $99,000 you needed.

For the monthly view, $99,000 ÷ 12 is $8,250 a month the practice has to bring in. The break-even calculator turns a monthly figure like that into the number of jobs or hours it takes.

Why are billable hours so much fewer than working hours?

Because you are the whole company, and most of what a company does is not billed to anyone. In a 40-hour week the client sees only the part you charge for.

The rest is work like this:

A realistic way to estimate your share is to track it. For two typical weeks, write down every hour in one of two groups: billed to a client, or not. Then divide billed hours by total hours. In a week that goes like this, 5 hours selling, 3 hours admin and invoicing, 2 hours learning, and 2 hours of unpaid revisions leaves 12 non-billable hours. Of 40, that is 28 billable, which is 70 percent.

If you have not started yet, you have no data. Pick a lower share than feels right. You can raise the estimate later, but you cannot easily raise a rate you already quoted.

Count out vacation, holidays, and sick days in the weeks input. The example assumes four weeks off.

What belongs in yearly business costs?

Anything you would stop paying for if you stopped working. The point is to put every cost in the rate so the cost does not come out of your income.

Here is a made-up list that adds to $9,000:

Your list will differ. Add a coworking space, training, memberships, or marketing if you pay for them. For one-time purchases to get started, see how much it costs to start a business. A cost left out of the rate still gets paid, from your pay.

Why is salary divided by 2,080 the wrong comparison?

Because a salary is paid for hours you are not billing, and the job comes with things you now buy yourself. A year of full-time work is 52 weeks × 40 hours, which is 2,080 hours. A $90,000 salary divided by 2,080 is $43.27 an hour.

The two numbers answer different questions. An employee is paid for sick days, holidays, vacation, and the hours spent in meetings and training. The employer often also pays toward health coverage and a retirement plan. You get none of that unless you pay for it. Your rate has to cover all of that from the hours clients pay for.

One more difference: a self-employed person pays taxes an employee does not pay in the same way. This guide and the calculator do not compute tax. Ask an accountant what you should set aside for the year, then add that dollar figure as its own line in your money-needed total. As a placeholder only, if the number were $20,000, then $99,000 + $20,000 = $119,000, and $119,000 ÷ 1,344 = $88.54. Use your accountant’s number, not this one.

When should you charge a day rate or a project price?

Use an hourly rate to work out what you need, then charge in whatever form the client finds easiest to say yes to. The hourly rate is your floor either way.

A day rate fits work that takes a set block of your attention, like on-site days or a workshop. The calculator’s day rate is your hourly rate times 8. It assumes you bill the full day, so for work you cannot fill a day with, price by the hour.

A project price fits work with a clear result and a scope you can describe. Estimate the hours, multiply by your rate, then add room for the revisions and surprises you know happen. Switch to project pricing when clients keep asking for the total up front, or when you get fast at a type of job and hourly billing would punish you for it. Stay hourly when the scope is unclear, because an open-ended job at a fixed price is how you end up working for free. For pricing that is not based on your time, read how to price a product or service.

How do you raise your rate?

Raise it when you are turning work away, when you are booked ahead, or when your costs go up. Those are signs the rate is too low, not signs you are doing well.

Apply the new rate to new clients first. They have nothing to compare it to. For existing clients, give notice before the next project or billing period and state the new figure plainly. Rerun the calculator with your tracked billable share, which you now know better than on day one.

Where to go next

Put your own numbers into the hourly rate calculator and change the billable share to see what it does. Then see what the rate means month to month with the break-even calculator. If the work is a product rather than your time, read how to price a product or service.

Common questions

Should I add a profit margin on top of the rate?

The rate already includes the income you want, so profit is what you take home above your target. If you want money kept in the business as a cushion, add it to the target income line so it shows up in the arithmetic.

What if my clients will not pay the rate I calculate?

Check the inputs first. A target income, a cost total, or a billable share that is too optimistic can all be adjusted. If the numbers hold and the market will not pay, the rate shows you the business needs a different offer, a different client, or lower costs.

How often should I recalculate?

At least once a year, and whenever your costs, weeks off, or billable share change. Your tracked billable share is the input most likely to move.

Put this in your plan

Read next