Labor Rate Calculator
Your Calculated Labor Rate
Understanding Your Labor Rate
Calculating your labor rate accurately is crucial for ensuring your business is profitable and sustainable. It's not just about how much you want to earn per hour; it's about covering all your costs and making a profit. This calculator helps you determine a fair and effective hourly rate by considering your desired income, the cost of benefits, your business overhead, and the number of hours you can realistically bill clients.
Components of Your Labor Rate:
- Desired Hourly Wage: This is the base amount you want to earn for your time and expertise before accounting for other expenses.
- Benefits Cost Per Hour: This includes any costs associated with employee benefits if you have staff, such as health insurance, retirement contributions, paid time off, and payroll taxes. Even if you're a solopreneur, you should consider setting aside money for your own future benefits.
- Overhead Costs: These are the ongoing expenses required to run your business, not directly tied to a specific project. Examples include rent for an office, utilities, software subscriptions, insurance, marketing, and administrative costs. We divide your total monthly overhead by your billable hours to allocate a portion of these costs to each hour worked.
- Billable Hours Per Month: This is the number of hours you realistically expect to spend working directly for clients each month. It's important to be conservative here, as it should exclude time spent on administrative tasks, marketing, training, and other non-billable activities.
How the Calculation Works:
The calculator first sums your direct labor cost (hourly wage + benefits cost). Then, it determines the overhead cost per billable hour by dividing your total monthly overhead by your billable hours. Finally, it adds these two figures together to give you your effective hourly labor rate. This rate ensures that every hour you bill not only compensates you for your time and benefits but also contributes to covering your business's operational expenses.
Example:
Let's say you want to earn $50 per hour (Desired Hourly Wage). You also pay $15 per hour in benefits for your employees (Benefits Cost Per Hour). Your business incurs $2,000 in monthly overhead costs (Monthly Overhead Costs), and you estimate you can bill 120 hours per month (Billable Hours Per Month).
- Total direct labor cost per hour = $50 + $15 = $65
- Overhead cost per billable hour = $2,000 / 120 hours = $16.67
- Total labor rate = $65 + $16.67 = $81.67
In this scenario, you would need to charge approximately $81.67 per hour to cover your desired wage, benefits, and overhead, and to remain profitable. Adjusting any of these figures will directly impact your required labor rate.