How it's calculated
A billable rate has to cover everything a person costs, spread over only the hours a client pays for. The calculator builds that up in three steps:
- Fully loaded cost. Pay, plus payroll taxes and benefits (entered as a percentage of pay), plus overhead allocated to the role: rent, software, equipment, admin. If you don't know your payroll and benefits percentage, the employee cost calculator works it out for a salary and state.
- Billable hours. Hours per week × weeks actually worked × utilization, the share of working time that is billed. Meetings, sales, training and admin are working hours that nobody pays for directly.
- Price for a target margin. The rate that leaves the profit margin you want after covering the loaded cost.
The formula
- Loaded annual cost = pay + pay × burden % + overhead.
- Billable hours = hours per week × working weeks × utilization %.
- Cost per billable hour = loaded annual cost ÷ billable hours.
- Billable rate = cost per billable hour ÷ (1 − target margin).
- Markup = billable rate ÷ cost per billable hour − 1.
Margin vs markup. Margin is profit as a share of the price; markup is profit as a share of cost. A 50% margin is a 100% markup: a rate twice the cost. Dividing by (1 − margin) is the standard way to price for a margin; adding the margin percentage to cost (cost × 1.3 for "30%") gives a 30% markup, which is a noticeably smaller margin.
Worked example
An employee paid $80,000, with payroll taxes and benefits of 20% of pay and $10,000 of overhead, works 40 hours a week for 48 weeks and bills 75% of that time. Each billable hour costs $73.61, so a 30% margin needs a rate of $105.16.
| Line | Annual | Per billable hour |
|---|---|---|
| Pay | $80,000 | $56 |
| Payroll taxes and benefits | $16,000 | $11 |
| Overhead | $10,000 | $7 |
| Fully loaded cost | $106,000 | $74 |
| Profit at target margin | $45,429 | $32 |
| Billings | $151,429 | $105 |
Utilization matters as much as pay. The same person billed at 60% instead of 75% needs $131.45 an hour for the same margin.
Assumptions and limitations
- Your estimates in, your rate out. Burden, overhead and utilization are inputs you supply; nothing here is an industry benchmark.
- One person, one year. Overhead shared across a team should be divided among the people who bill.
- Margin is before income tax on the business's profit.
- Hourly pay is treated as paid for every week of the year at the hours entered; if hourly staff are unpaid for time off, enter their actual yearly pay as a salary instead.