How to Calculate Your Hourly Rate as a Consultant

When transitioning from a salaried employee to an independent consultant, the very first question you have to answer is: "What is my hourly rate?"

Many new consultants make a massive mathematical error here. They take their old corporate salary, divide it by 2,000 working hours, and use that number.

If your old salary was $100,000, you might set your consulting rate at $50/hour. This is a guaranteed path to bankruptcy.

As a consultant, $50 an hour does not equal a $100,000 salary. Here is how to calculate your true hourly rate.

The Problem with the Standard Calculation

When you were an employee, your company paid for far more than just your base salary. They paid for:

• Half of your payroll taxes (FICA)
• Your health insurance premiums
• Your paid time off (PTO) and sick days
• Your laptop, software licenses, and office space

As a consultant, you are now a business owner. You have to pay for all of those things yourself out of your hourly rate.

Furthermore, you will not be billing 40 hours a week. As a freelancer, you will spend at least 30% of your time doing unbillable admin work, marketing, and pitching new clients.

The Consultant's Multiplier Rule

A standard rule of thumb in the freelance industry is to take your desired corporate hourly rate and multiply it by 2 or 2.5.

If you want to live a $100,000 lifestyle (which is $50/hour), your minimum consulting rate should be $100 to $125 per hour.

This multiplier ensures that you can afford your own health insurance, pay the 15.3% self-employment tax, take two weeks of unpaid vacation, and still have enough money left over to actually live on.

The Bottom-Up Calculation Method

If you want to be perfectly precise rather than using a multiplier, you must calculate your rate from the bottom up.

1. Calculate Personal Needs: How much net income do you need to survive? (e.g., $60,000)
2. Add Business Overhead: Add up health insurance, software, marketing, and legal fees. (e.g., $20,000)
3. Add Taxes: Add 25% to 30% to cover income and self-employment taxes. (e.g., $30,000)
4. Total Gross Revenue Needed: $110,000
5. Divide by Billable Hours: Assume you will only realistically bill 1,000 hours a year (roughly 20 hours a week of pure client work).

Calculation: $110,000 ÷ 1,000 = $110/hour.

Track Your Billable Time

Once you have established a profitable hourly rate, you must rigorously track every minute you spend on client work. Use our free Time Duration Calculator to perfectly calculate your billable decimals and ensure you never undercharge on an invoice again!