How the rate is worked out
The calculator runs four steps. It grosses up your take-home income for tax, adds your business expenses, counts the hours you can bill in a year, then divides.
Worked example
You want to keep $60,000.00 a year and set aside 25% of profit for tax. You need $80,000.00 of profit before tax. Add $6,000.00 of expenses and you need $86,000.00 of revenue. With 6 weeks off and 25 billable hours a week you have 1,150 hours to sell, so the rate is $74.78 an hour or $373.91 a day.
Dividing the same $60,000.00 by a full-time year of 2,080 hours (52 weeks of 40 hours) gives $28.85 an hour. That figure ignores tax, expenses, time off and unbilled hours, which is why it is too low.
Choosing honest inputs
- Billable hours. Finding clients, writing proposals, invoicing and admin are not billable. If you do not know your number, track your time for a few typical weeks and use that.
- Tax set-aside. This is one flat percentage of profit. Real tax systems have bands, allowances and separate social contributions, and they differ by country. Use your effective rate from a past return, or ask an accountant.
- Weeks off. Count public holidays and sick days as well as holidays. Nobody pays you for them.
Questions
Is this the rate I should quote?
It is the lowest rate that meets your income target with these inputs. What clients in your market pay is a separate question. If the market rate is higher, charge it. If it is lower, something in the inputs has to change.
Does it work for project pricing?
Yes. Estimate the hours a project will take, multiply by the hourly rate, and treat the result as the least you can accept for the project.
Why are expenses added after the tax step?
Tax is normally charged on profit, which is revenue minus business expenses. So the tax gross-up applies to your income only, and expenses are added afterwards.