Converting a salary into an hourly rate leaves out what the employer was paying for

The calculation everybody does first

The instinctive way to set a rate is to take what you used to be paid, divide by the hours in a working year, and add a little for independence. It produces a number that feels defensible and is usually a long way below what the work needs to be sold for.

The error is not in the division. It’s in treating a salary as the full cost of employing somebody, when a salary is only the visible portion of an arrangement that included a great deal else.

What an employer was buying that you now buy yourself

Paid time off is the clearest example. Holiday, public holidays and periods of illness were weeks in which money continued to arrive without work being done, and that money came from somewhere — it was priced into the total cost of the role. Working independently, those weeks are simply unpaid unless the rate covers them.

Then there is everything that surrounds the job. A workspace, heating and light, equipment, software licences, the connection you work over, training, professional memberships, and in many arrangements a pension contribution and some form of cover. Each was invisible because somebody else bought it centrally, and each is now a line item in your own accounts.

The employment relationship in most countries also carries employer-side contributions, levies or insurances that never appeared on the payslip at all. What those are and how they work differs by country and it is not worth guessing at — but the general point holds everywhere: the cost of employing a person exceeds what that person receives, sometimes substantially.

The gaps between engagements

An employee is paid continuously, including the days when there is not much to do. An independent worker is paid for work, and between contracts there may be nothing at all.

Those gaps are a real cost and they belong in the rate. How large they are depends entirely on your trade and how you find work, which is why this is a figure to measure from your own experience rather than assume. A year with two quiet months isn’t a failure; it is a normal year in many trades, and the rate has to have anticipated it.

Risk has a price and now you are carrying it

The clearest difference between the two arrangements is not money at all, it is what happens when something goes wrong. An employee whose project is cancelled generally keeps being paid. An independent supplier whose client cancels stops being paid, and may have turned down other work to be available.

Similarly, mistakes are handled differently. Where an employee errs, the organisation absorbs it. Where you err, you absorb it — possibly by redoing the work unpaid, possibly by refunding, possibly through whatever cover you hold. That exposure is part of what the higher rate exists to compensate, and it isn’t a bonus for bravery. It is a cost being priced.

Why the resulting number looks shocking

Work through these adjustments honestly and the hourly figure typically lands well above the naive salary conversion, often by a multiple rather than a margin. The instinct is to assume the arithmetic is wrong, or that no client would pay it.

They are two different objections and only the second one is worth taking seriously. The arithmetic is not wrong — the costs are real and they will arrive whether or not the rate anticipated them. Whether the market will pay it is a genuine question, and if the answer is no, the honest conclusion is that this particular work at this volume does not support a viable independent business, not that the costs have gone away.

That’s a hard thing to conclude and it is better concluded on a spreadsheet than discovered over eighteen months.

Tax is a separate layer and it varies

How income from self-employment is taxed, what can be deducted, and what contributions are due are all matters that differ sharply by country and by legal structure, and they change. Nothing general is worth relying on here.

What is worth knowing is that the comparison between a salary and a self-employed income is not a like-for-like comparison of gross figures, and that the difference can run in either direction depending on where you are. An accountant in your jurisdiction can produce the comparison for your actual circumstances, which is the only version that will not mislead you.