To set your consulting rate, start from the income you actually want to keep, add your overhead and taxes, then divide by the hours you can realistically bill in a year, not the hours you sit at your desk. Most independent consultants can bill only 50 to 70 percent of their working hours, so a rate that looks generous next to a salary often falls short once that gap and self-employment taxes come out.
The rate question tends to get answered badly. People either copy whatever a peer charges, or they take their old salary, divide by 2,080, and call it a day. Both skip the two facts that decide whether your rate works: you don’t bill every hour you work, and nobody withholds your taxes for you anymore. Build the number up from those, and you’ll price with a straight face instead of a shrug.
Start with the income you want to keep, not a rate
Work backward. The rate is the last number you calculate, not the first. Before you can price an hour, you need three figures for the year: what you want to pay yourself, what it costs to run the business, and what you owe in taxes.
Say you want the rough equivalent of a $95,000 salaried job. That’s your take-home target, the money that lands in your personal account after the business has paid everything else. It is not your revenue. Revenue has to be bigger, because a chunk of it never reaches you.
- Your pay: the salary-equivalent you want to keep, say $95,000.
- Overhead: software, liability insurance, a bookkeeper or accountant, a coworking desk, professional development, that laptop you’ll replace. For a solo consultant this often runs $10,000 to $20,000 a year. Call it $15,000.
- Taxes: as a self-employed person you cover both halves of Social Security and Medicare (15.3 percent up to the wage base) plus federal and any state income tax. A working set-aside of 25 to 35 percent of your profit is realistic for most people at this income level.
Figure out how many hours you can actually bill
This is where most rates go wrong. A full-time year is about 2,080 hours, but almost none of that is billable for an independent.
First, take time off. Four weeks of vacation, a scatter of holidays, and a few sick days is roughly six weeks gone, leaving about 46 working weeks, or 1,840 hours. Then subtract the work you can’t invoice: sales calls, proposals, invoicing, your own marketing, admin, that Slack you’ll never send a bill for. For most consultants, non-billable work eats 30 to 50 percent of the week. At 40 percent, you’re left with about 1,100 billable hours a year.
Watch out: Newer consultants almost always overestimate billable capacity. In year one, closer to 50 to 55 percent non-billable is normal because you’re still building the pipeline. If you price against 1,500 billable hours and only deliver 900, you’ll come up short by a third and blame the market. Price against the conservative number and treat the extra hours as upside.
The worked example: from target to hourly rate
Now the arithmetic. To net $95,000 after tax, you need to earn more than $95,000 in personal income, because tax comes off the top. Grossing up at a combined effective rate of about 28 percent, your pre-tax personal income needs to be roughly $132,000. Add overhead, and you have your revenue target.
| Step | Amount |
|---|---|
| Take-home pay you want | $95,000 |
| Pre-tax income needed (grossed up ~28%) | $132,000 |
| Plus business overhead | $15,000 |
| Revenue target for the year | $147,000 |
| Billable hours available | 1,100 |
| Minimum hourly rate | ~$134/hour |
Round that up. $134 is your floor, the number below which you’re subsidizing the client. Charge $140 to $150 and you’ve built in cushion for the projects that run long and the months the pipeline goes quiet. Notice how far this sits above the naive $95,000 ÷ 2,080 = $46 an hour. That $46 figure is the trap: it pays you a salary and forgets that you now buy your own health insurance, fund your own retirement, and eat every unbillable hour.
A day rate follows from the same math. Eight billable hours at $140 is $1,120, so a day rate of $1,100 to $1,200 is consistent. Many consultants nudge the day rate slightly below the strict hourly multiple as a volume gesture, which is fine as long as you don’t drift under your floor.
When to stop selling hours and price the outcome
Hourly and day rates are honest, easy to quote, and they cap your income at the number of hours in your calendar. The better you get, the more that model punishes you: you solve in three hours what used to take ten, and hourly billing hands the client a discount for your expertise.
Value-based pricing flips that. You quote a fixed fee tied to what the work is worth to the client, a website migration that protects $500,000 in revenue, a positioning project that unlocks a funding round. The fee references their outcome, not your clock. You’re ready to make the shift when you can confidently estimate scope, when the client cares about a result more than a timesheet, and when you’ve done the work often enough to know it won’t spiral. Until then, your hourly floor is the safety net underneath every fixed quote: if a project fee divided by your honest hour estimate lands below that floor, the quote is too low.
Why a retainer’s real rate isn’t what it looks like
Retainers smooth your income, which is worth a lot when you’re independent. But the headline number hides the effective rate, and that’s where retainers quietly win or lose money for you.
Say you offer a $4,000-a-month retainer for “up to 20 hours.” On paper that’s $200 an hour. If the client only uses 12 hours in a slow month, your effective rate jumps to $333. If they lean on you for 25 hours during a launch, you’ve dropped to $160 and you’re eroding, doing work you’re not paid for and training the client to expect it. The retainer is only as good as the scope discipline around it.
Before you name a retainer figure, run both scenarios and compare them against your hourly floor. The Retainer vs. Hourly Calculator does the effective-rate math for you across a range of usage, so you can see the month where a retainer stops paying and set the hour cap accordingly. It’s the fastest way to sanity-check a monthly package before you put it in a proposal.
Frequently asked questions
How do I convert my old salary into a consulting rate?
Don’t divide salary by 2,080. Add the benefits your employer used to cover (health insurance, payroll taxes, retirement match, paid time off), which can add 25 to 40 percent, then divide by your realistic billable hours, not total hours. A $95,000 salary usually maps to a consulting rate north of $130 an hour once those are baked in.
What percentage of my time will actually be billable?
For an established solo consultant, plan on 50 to 70 percent of working hours being billable. The rest goes to sales, admin, marketing, and delivery overhead. In your first year, assume the lower end, closer to 50 percent, because you’re still building a pipeline.
How much should I set aside for taxes as a self-employed consultant?
Set aside 25 to 35 percent of your profit as a working estimate. You’re paying self-employment tax (15.3 percent up to the wage base) on top of federal and any state income tax. Move the money to a separate account each time you’re paid so quarterly estimates don’t ambush you.
Is a day rate just my hourly rate times eight?
Roughly. Multiply your hourly rate by billable hours in a day, usually seven or eight. Some consultants set the day rate slightly below the strict multiple as a volume incentive, but never let it fall under your hourly floor, the rate below which you lose money.
When should I switch to value-based pricing?
When you can scope the work confidently, the client cares about the outcome more than the hours, and you’ve done the job enough times to price it without fear of it spiraling. Keep your hourly floor as a check: divide any fixed fee by your honest hour estimate and make sure it clears that floor.
How do I know if my retainer is priced right?
Calculate the effective hourly rate at both low and high usage, not just the average. A retainer that looks like $200 an hour can quietly drop to $160 in a heavy month. Running it through the Retainer vs. Hourly Calculator shows you where the package stops being worth it and helps you set the right hour cap.
A rate is only as accurate as the numbers behind it, and those numbers live in your books. Tabby handles the bookkeeping for self-employed consultants automatically, tracking overhead, categorizing expenses, and keeping your tax set-aside in view, so the income target you price against is real instead of a guess. Start a free trial and price your next project from numbers you trust.
