One of the most common mistakes independent contractors make is dividing a salary by 2,080 hours and calling that their rate. That works for a W-2 employee, but it ignores the costs a contractor carries alone: self-employment tax, health insurance, tools, software, marketing, invoicing, and the gaps between jobs. This contractor rate calculator does the opposite. You start from the salary you want to pay yourself, add your overhead and a profit margin, and divide by the hours you can actually bill. The result is the hourly rate you must quote to make the math work.
Move the sliders and every figure updates instantly. The answer card shows the annual billings you need, how much of that goes to overhead and profit, the hourly rate itself, a converted day rate, and the monthly revenue target you should hold yourself to.
How to Use
- Enter your Target Annual Take-Home — the salary you want the business to pay you each year, before personal income tax. If you are leaving a $90,000 W-2 role, start there.
- Set Billable Hours / Year to a realistic number, not 2,080. Out of forty work hours you may bill six or seven; once you count sales calls, admin, quoting, vacation and illness, solo contractors often bill 1,000–1,500 hours a year.
- Set your Business Overhead as a percentage of billings. This covers insurance, software subscriptions, equipment, fuel, home office, bookkeeping, marketing, and the self-employment tax. Thirty percent is a reasonable starting point.
- Set your Profit Margin. This is the money the business keeps for slow months, late invoices, and reinvestment rather than your pay. A healthy solo business holds 15–25%.
- Read the Required Hourly Rate on the result card. That is your floor — the lowest rate at which the numbers work. Quote above it when the market will bear it.
The engine works backwards from your salary. If overhead and profit together eat 50% of every dollar you bill, your take-home is only the other half — so you have to bill twice your salary to keep what you planned.
The Build-Up Formula
Contractor pricing is a cost-plus build-up. Let R be the annual revenue you must collect:
Required Revenue = Target Take-Home ÷ (1 − Overhead% − Profit Margin%)
Then:
Hourly Rate = Required Revenue ÷ Billable Hours per Year
Notice that both overhead and profit are percentages of your billings, not of your salary. That is the key insight most calculators miss. When overhead is 30% and margin is 20%, only 50 cents of every billed dollar reaches your pocket. To take home $90,000 you therefore need $180,000 in billings, not $90,000.
Worked example: $90,000 take-home, 1,200 billable hours, 30% overhead, 20% margin. Required revenue = 90,000 ÷ (1 − 0.30 − 0.20) = 90,000 ÷ 0.50 = $180,000. Overhead absorbs $54,000, profit retains $36,000, and the hourly rate is 180,000 ÷ 1,200 = $150 per hour. Over an eight-hour day that is a $1,200 day rate, and you need roughly $15,000 in billings every month.
If overhead plus margin reaches or exceeds 100%, the formula has nothing left to pay you — the calculator flags this as an error rather than printing a nonsense rate.
Why Billable Hours Matter More Than You Think
A full-time job is 2,080 hours, but a contractor rarely bills all of them. Winning work takes time: writing proposals, following up, onboarding clients, fixing invoicing, doing taxes, and taking the odd Friday off. If you assume 2,080 billable hours you will price yourself about 40% too low and wonder where the money went.
Track your billable time for a month and use the real number. Most solo operators land between 1,000 and 1,500 billable hours. Dropping from 1,500 to 1,200 hours on the same $90,000 salary raises the required hourly rate from $120 to $150 — a 25% increase that reflects the extra non-billable work the business demands.
Examples
Example 1 — The default build-up. A trades contractor wants $90,000 to live on, bills 1,200 hours a year, runs 30% overhead (insurance, truck, tools, fuel, bookkeeping), and wants a 20% profit cushion. Required billings are $180,000, overhead $54,000, retained profit $36,000, and the required rate is $150/hour — a $1,200 day rate.
Example 2 — A low-overhead solo freelancer. A writer works from home with almost no overhead (10%) and wants a lean 10% margin, but bills 1,500 hours and only needs $60,000 take-home. Required revenue = 60,000 ÷ (1 − 0.10 − 0.10) = 60,000 ÷ 0.80 = $75,000, and the hourly floor is 75,000 ÷ 1,500 = $50/hour. Anything charged above $50 is upside on top of the plan.
Example 3 — High rates at scale. A senior independent consultant targets $1,200,000 in personal draw, bills 1,600 hours, and runs 30% overhead with a 20% margin. Required billings = 1,200,000 ÷ 0.50 = $2,400,000, and the required rate is $1,500/hour — a $12,000 day rate. This shows how quickly the required number climbs once a six-figure-plus salary and a realistic overhead stack on top of each other.
FAQ
How do I calculate my contractor hourly rate?
Start with the annual salary you want to pay yourself, divide it by (1 minus your overhead percent minus your profit margin percent), then divide that required annual revenue by the number of hours you can actually bill in a year. For a $90,000 salary, 30% overhead and 20% margin, the required revenue is $180,000; at 1,200 billable hours that is $150 per hour.
What is a good billable hours per year figure?
Use your actual tracked number. A full 2,080-hour job is not the same as 2,080 billable hours, because contractors also quote, sell, invoice, and market. Most solo contractors realistically bill 1,000–1,500 hours a year. Plugging 2,080 will underprice you by roughly a third.
Should I include profit margin, or is overhead enough?
Overhead pays the bills of running the business; profit margin is what stays in the company to survive slow months, absorb bad invoices, and buy new equipment. Pricing overhead-only means one quiet quarter sinks you. Most healthy solo contractors retain 15–25% of billings as profit.
How do I turn my hourly rate into a day rate?
Multiply the hourly rate by the number of billable hours in a work day. The default model uses eight hours, so a $150 hourly rate becomes a $1,200 day rate. If your typical day has six billable hours, multiply by six instead.
Why is my required rate so much higher than my old salary ÷ 2080?
Because as a contractor you now pay both the employer and employee side of payroll tax, buy your own benefits, cover tools and insurance, and carry the risk of gaps between contracts. Dividing a $90,000 salary by 2,080 gives $43/hour, but that figure ignores roughly half of your true cost base — the build-up formula recovers it.
What happens if overhead plus profit margin is 100% or more?
There is nothing left to pay you. The calculator returns an error instead of a negative or infinite rate. Lower your overhead, lower your margin, or raise the price you charge so the two percentages together leave room for your salary.
Disclaimer
This contractor rate calculator is provided for informational purposes only and does not constitute financial, tax, legal, or pricing advice. Results are estimates based on the inputs you enter and the standard cost-plus build-up formula; actual costs, self-employment tax brackets, insurance, and market rates vary by location, trade, and experience. Always confirm your overhead and tax position with a qualified accountant, and test your rate against what local clients actually pay before committing to a quote.