Pricing your hourly rate as a freelancer
A new freelancer looking for an hourly rate usually does one piece of arithmetic: I want ILS 15,000 a month, there are roughly 186 working hours in a month, so ILS 80 an hour. That number is wrong by a factor of more than two, and it takes about a year to find out.
Three things are missing from it. Tax comes off the amount rather than being added to it, expenses leave before anything is left, and most of a freelancer's working hours are hours nobody pays for.
Hours someone pays for
This is the most expensive mistake of the three. A full week runs around 42 hours, but quoting, email, chasing a client who has not paid, marketing, professional learning and bookkeeping never reach anyone's invoice. For most freelancers billable hours land between 20 and 32 a week, and anyone starting out sits at the low end.
A year has 52 weeks, less vacation, public holidays and sick days. Five weeks is a fairly conservative assumption.
Measure this number rather than guessing it. Two months of tracking hours, both in the diary and on the invoice, is enough to show the real ratio between hours worked and hours billed.
Expenses leave before the profit
Car, phone, software, professional insurance, an accountant and an office are money that goes out before anything is left for you, so they add to the turnover you need rather than coming off it. A freelancer with ILS 1,500 of monthly expenses needs ILS 18,000 a year just to get back to zero.
Expenses do cut taxable income, so part of them comes back through the tax. What is recognized and at what percentage is covered in the deductible expenses guide, and the arithmetic is in the deductible expenses calculator.
Tax is not a flat percentage
Income tax is charged in brackets, so there is no single "my tax rate". On taxable income of ILS 244,000 a year, income tax and National Insurance come to roughly ILS 64,000 together, about 26% on average. The next shekel, though, is taxed at 35% income tax plus 18% National Insurance and health tax, and that is what decides how much the rate has to rise to add ILS 1,000 to your net.
Two things pull the other way. 52% of National Insurance contributions is deductible against income tax, and credit points take ILS 2,904 off the tax per point. A man gets 2.25 base points, a woman 2.75, with more for children, new immigrant status and single parenthood.
The full calculation, back to front
Take a freelancer who wants ILS 15,000 net a month, bills 30 hours a week, takes five weeks off and spends ILS 1,500 a month on the business.
The target annual net is ILS 180,000. For that much to remain, taxable income has to reach ILS 244,032: income tax takes ILS 29,626 and National Insurance with health tax takes ILS 34,405. Add ILS 18,000 of expenses and the required annual turnover is ILS 262,032. Divide by 1,410 billable hours and the rate is ILS 186 an hour.
The same person who divided 15,000 by 186 hours got 80. That gap is not a rounding error, it is the living.
The hourly rate calculator runs this with your own figures, including a day rate and the rate with VAT added.
What the calculation still leaves out
Pension and study fund deposits are not a business expense but money moving into your own savings, and they leave you with the same net. Anyone depositing the recognized maximum needs a higher rate, even after the tax benefits the deposit earns. The detail is in the pension and study fund guide.
Also missing are unplanned days off, a client who never pays, and equipment that needs replacing every three years. Adding 10% to the calculated rate is a reasonable cushion for all three.
VAT is not part of the rate
An osek murshe quotes a rate before VAT and adds 18% on the invoice. To a business client this is invisible, because they reclaim that VAT as an input. To a private customer the price they feel is the total, so it is worth quoting them a final figure and saying it includes VAT.
An osek patur charges no VAT and therefore looks cheaper to a private customer. In exchange they cannot reclaim input VAT, which makes every expense 18% more expensive. The full comparison is in the osek patur versus osek murshe guide.
Part of what lands in the account also has to stay there. The invoice set-aside calculator returns the exact percentage.
Pricing by outcome instead of by hour
Hourly pricing punishes you for speed: the better you get at a task, the less you earn from it. That is why many experienced freelancers move to a fixed price per project or a monthly retainer.
The hourly figure does not stop being useful in that move, it changes job. It becomes the floor you test against: a fixed-price quote that works out at ILS 140 per hour actually worked is a quote that loses money, however large the total sounds. After a few projects with hours tracked, you can see which kinds of work clear the floor and which do not.
When to update
Once a year, plus in any of these three cases: expenses went up, the share of billable hours went down, or the brackets or ceilings were updated. Going from 186 to 200 is 7.5%, a number most existing clients absorb without argument when told in advance and in writing.
A client who leaves over 7.5% was going to leave anyway. A client who stays three years at the same price costs you more than it seems, because every one of those years erodes against brackets and prices that did move.
Common questions
How do you calculate a freelance hourly rate?
Start from the annual net you want, add the income tax and National Insurance that will be charged on it, add your business expenses for the year, and divide the total by your billable hours. Billable hours are only the hours a client pays for, not every hour you work.
How many billable hours are there in a year?
Someone working 47 weeks a year and billing 30 hours a week reaches 1,410 hours. A full week is around 42 hours, but a large share goes to quoting, chasing payment, marketing, bookkeeping and learning, none of which is billed.
Is VAT included in the hourly rate?
No. An osek murshe quotes a rate before VAT and adds 18% on the invoice. An osek patur charges no VAT at all, and in exchange cannot reclaim input VAT on expenses.
Why is my tax percentage higher than expected?
Income tax is charged in brackets, so each extra shekel is taxed at the marginal rate rather than the average one. On top of that come National Insurance and health tax, together 18% on the part above 60% of the average wage. Credit points and the 52% deduction of National Insurance contributions offset part of it.
How often should the rate be updated?
At least once a year. Brackets and ceilings change, expenses rise, and the share of hours that reach an invoice moves with your client mix. A rate set once and left alone erodes on its own.