Calculate Labor Rate

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Labor Rate Calculator

Billable Labor Rate Calculator

Employee's gross pay per hour
Taxes, insurance, benefits (Standard: 20-30%)
Rent, admin, software costs per hour
Target Net Profit on sales
True Cost Per Hour
$0.00
Recommended Billable Rate
$0.00

Breakdown:

  • Base Wage: $0.00
  • Burden Cost: $0.00
  • Overhead: $0.00
  • Break-even Cost: $0.00

How to Calculate Labor Rate for Service Businesses

Calculating the correct labor rate is essential for any service-based business, from construction contractors to digital agencies. If your billable rate only covers the employee's hourly wage, you are likely losing money on every hour worked. To ensure profitability, you must account for the "Labor Burden" (taxes and benefits), overhead expenses, and your desired profit margin.

Understanding the Components

  • Base Hourly Wage: This is the raw dollar amount you pay the employee per hour (e.g., $30/hr).
  • Labor Burden: This includes payroll taxes, workers' compensation, health insurance, paid time off, and retirement contributions. In many industries, this ranges from 20% to 40% of the base wage.
  • Overhead Allocation: These are the indirect costs of doing business that cannot be billed directly to a client. Examples include rent, utilities, administrative staff salaries, marketing, and software subscriptions. These costs must be divided by total billable hours to find the "Overhead per Hour."
  • Profit Margin: The percentage of revenue you wish to keep as net profit after all costs are covered.

The Labor Rate Formula

To calculate a profitable billable rate, follow this two-step process:

Step 1: Calculate True Hourly Cost (Break-even)
True Cost = Wage + (Wage × Burden %) + Overhead/hr

Step 2: Calculate Billable Price with Margin
It is critical to calculate profit based on Margin (a percentage of the final selling price), not just Markup (a percentage added to the cost).

Billable Rate = True Cost / (1 - Desired Profit Margin %)

Example Calculation

Let's say you run an electrical business:

  • Electrician Wage: $30.00/hr
  • Labor Burden: 20% (Adding $6.00/hr)
  • Overhead Allocation: $15.00/hr (Rent, truck, tools)
  • True Cost: $30 + $6 + $15 = $51.00/hr

If you want a 20% Profit Margin:

$51.00 / (1 - 0.20) = $51.00 / 0.80 = $63.75

Your billable labor rate should be $63.75 per hour. If you simply marked up the cost by 20% ($51 * 1.2), you would only charge $61.20, which results in a lower actual profit margin.

function calculateLaborRate() { // Get input values var wage = parseFloat(document.getElementById('hourlyWage').value); var burdenPercent = parseFloat(document.getElementById('laborBurden').value); var overhead = parseFloat(document.getElementById('overheadHourly').value); var marginPercent = parseFloat(document.getElementById('profitMargin').value); // Validation if (isNaN(wage) || wage = 100) { alert("Profit margin must be less than 100%."); return; } // Calculations var burdenCost = wage * (burdenPercent / 100); var totalCostPerHour = wage + burdenCost + overhead; // Calculate Billable Rate based on Margin Formula: Price = Cost / (1 – Margin) var marginDecimal = marginPercent / 100; var billableRate = totalCostPerHour / (1 – marginDecimal); // Update UI document.getElementById('resultsSection').style.display = 'block'; // Main Results document.getElementById('displayCostPerHour').innerHTML = '$' + totalCostPerHour.toFixed(2); document.getElementById('displayBillableRate').innerHTML = '$' + billableRate.toFixed(2); // Breakdown Table document.getElementById('outWage').innerHTML = '$' + wage.toFixed(2); document.getElementById('outBurden').innerHTML = '$' + burdenCost.toFixed(2); document.getElementById('outOverhead').innerHTML = '$' + overhead.toFixed(2); document.getElementById('outTotalCost').innerHTML = '$' + totalCostPerHour.toFixed(2); }

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