Marcus quotes clients $75 an hour for web development work. When a friend asked what he actually makes per hour, he said "about $75, minus some for taxes" — and put it at maybe $55 after that. Running his real numbers through a calculator put his true hourly rate at $30.33. Not because his rate is wrong, but because "per hour" was hiding three separate deductions he'd never stacked together.
The Three Things $75/Hour Doesn't Account For
A quoted hourly rate only applies to hours a client is billed for. Marcus works roughly 45 hours a week total — coding, but also scoping proposals, chasing invoices, and marketing for the next client — and bills for about 25 of them. He takes 4 weeks off a year, so he works 48 weeks. On top of that, he carries about $600/month in business overhead: software subscriptions, a coworking desk, an accountant. Then federal tax applies to what's left. None of that is visible in a $75/hour quote.
Step 1: Unbilled Hours
Billable revenue: $75 × 25 hours/week × 48 weeks = $90,000/year.
That $90,000 was earned across 45 hours/week of total work, not 25. Spread the same $90,000 over all 2,160 hours he actually worked (45 × 48 weeks):
$90,000 ÷ 2,160 hours = $41.67/hour — before a single dollar of expense or tax comes out. Billing at 55.6% utilization (25 of 45 hours) already cuts the effective rate by $33.33, more than any tax bracket will.
Step 2: Business Expenses
Marcus's $600/month in overhead comes to $7,200/year, straight off the top:
$90,000 − $7,200 = $82,800 in business profit. Spread over the same 2,160 total hours, that's $38.33/hour.
Step 3: Federal Tax — Computed Properly, Not Estimated
This is where most back-of-envelope math goes wrong, because self-employment tax doesn't apply to the full $82,800, and neither does income tax.
Self-employment tax is 15.3% of 92.35% of net profit (the 92.35% factor approximates the employer-side share an employee's paycheck never sees): $82,800 × 92.35% = $76,466 in net earnings, taxed at 15.3% = $11,699.
Half of that SE tax is deductible above the line, which reduces taxable income before the QBI deduction and the standard deduction ($16,100 for a single filer) are applied. That leaves $60,850 in pre-QBI taxable income.
The QBI deduction (Section 199A) allows 20% of qualified business income, capped at 20% of taxable income before the deduction — a cap that binds for almost every sole proprietor, because taxable income after other deductions is smaller than the profit it came from. For Marcus, 20% of his $76,950 business income (profit after half his SE tax) comes to $15,390 uncapped, but the cap limits the actual deduction to 20% of his $60,850 pre-QBI taxable income instead — $12,170.
Taxable income after QBI: $60,850 − $12,170 = $48,680, which produces $5,594 in ordinary federal income tax at 2026 single-filer brackets.
Total federal tax: $11,699 SE tax + $5,594 income tax = $17,293 — an effective rate of 20.9% on his $82,800 in business profit, well below the 30%+ figure Marcus had guessed.
Where the $75 Actually Goes
| Stage | Running total | Rate per total hour |
|---|---|---|
| Quoted rate | $90,000 billable revenue | $75.00 (billed hours only) |
| Spread over all hours worked | $90,000 | $41.67 |
| After $7,200 business expenses | $82,800 | $38.33 |
| After $17,293 federal tax | $65,507 | $30.33 |
Utilization costs Marcus more than tax does: dropping from $75 to $41.67 is a $33.33 hit, while tax only takes the remaining number from $38.33 to $30.33 — an $8 hit. A freelancer chasing a higher quoted rate before fixing a 55.6% utilization problem is optimizing the smaller lever.
What This Doesn't Include
This is federal tax only — no state income tax, which this site doesn't model because rates and rules vary too much by state to state honestly. It also assumes Marcus takes no health insurance premium deduction and has no retirement contribution, both of which would lower his taxable income (and raise his true hourly rate) further. And it's single-filer math; married filing jointly changes the bracket math somewhat.
See Your Own Rate
Marcus's inputs — a quoted rate, weekly billable and total hours, monthly overhead — are the same five numbers the True Hourly Rate Calculator asks for. It also computes what you'd need to quote to hit a specific take-home target, working backward through the same tax math rather than a flat percentage guess.
Frequently Asked Questions
Is Marcus's real hourly rate ($30.33) actually low for a freelance developer?
Not necessarily — the point isn't that $30.33 is bad, it's that it's a different number from $75, and decisions about raising rates, saying no to low-paying clients, or comparing freelancing to a salaried offer should use the real number, not the quoted one. A developer who knows their true rate is $30.33 can decide whether that beats a specific W-2 offer; one who thinks it's $55 is comparing against the wrong baseline.
Why does utilization matter more than tax in this example?
Because the gap between billed hours (25) and total hours worked (45) is large — Marcus bills for barely over half his work week. Tax is a fixed-ish percentage of profit, but utilization is a multiplier on the entire rate before profit is even calculated, so a low utilization rate compounds every dollar earned, not just the marginal ones.
Would incorporating as an S-corp change this math?
It could, at a high enough profit level — an S-corp lets an owner split income between salary and distributions, and distributions aren't subject to self-employment tax. At $82,800 in profit, the payroll costs and administrative overhead of an S-corp typically outweigh the SE tax savings; the breakeven point is usually well above $60,000–$80,000 in profit, and it depends heavily on state-specific payroll costs this calculator doesn't model.
Does taking more vacation weeks help or hurt the true hourly rate?
It's neutral on the hourly rate itself in this model, because both billable and total hours scale down with fewer working weeks — but it obviously lowers total annual income. The true hourly rate answers "what am I earning per hour of my life spent working," not "how much will I make this year," and those are different questions with different right answers.
What counts as a "business expense" in this calculation?
Anything ordinary and necessary for running the freelance business — software subscriptions, a coworking membership, professional accounting fees, business insurance, and similar costs. It does not include personal expenses, and it's separate from the standard deduction, which applies regardless of business expenses and is already built into the tax calculation above.