Freelance & contractor

Why is a freelance hourly rate not comparable to a salaried one?

Because an hourly rate is charged on billable hours only, while a salary is paid on all of them. A freelancer who bills 25 hours in a 40-hour week is earning their rate on roughly 60% of the time they work — the rest goes to quoting, invoicing, admin, and finding the next piece of work. Before any tax enters the picture, the effective rate is already well below the quoted one.

Then three costs that an employer normally absorbs move onto the freelancer: the employer half of payroll tax, paid holiday and sick leave, and benefits such as health cover and retirement contributions. The common heuristic of doubling a target salary to reach an hourly rate is a rough attempt to price all of this at once. It is in the right region for many situations and badly wrong for some, which is why the hourly-rate calculator asks for the specific inputs rather than applying a multiplier.

What is self-employment tax and why is it larger than expected?

Self-employment tax is both halves of Social Security and Medicare. An employee pays one half and never sees the other, because the employer remits it. Someone self-employed is both parties and owes both halves — so the rate roughly doubles relative to the number on a payslip. It is assessed on net business profit rather than on gross receipts, and it sits alongside income tax rather than replacing it.

Two things soften it, and both are frequently missed. A portion of the tax is itself deductible when computing income tax, and business expenses reduce the profit the tax is assessed on before the rate is applied. The self-employment tax calculator applies both rather than quoting the headline rate against gross income, which would overstate the bill considerably.

Why do quarterly payments catch people out?

Because nothing withholds them. An employee's tax arrives in instalments they never have to schedule; a freelancer's does not arrive until they send it. Income earned in one quarter is generally due shortly after that quarter closes, not at the end of the year — so a profitable first quarter creates a payment obligation months before any annual return exists. The money has usually been spent by then. Estimating the liability as income is earned, rather than reconstructing it later, is the entire point of doing this arithmetic early.

Which of these tools should I use?

Use the hourly-rate calculator when setting or revising what you charge, and the day-rate calculator when a client wants a daily figure rather than an hourly one — the conversion is not simply eight hours. Use the self-employment tax calculator to estimate what to set aside as you earn. Use invoice take-home when a specific invoice has landed and the question is what part of it is actually yours.