Bill Rate Calculator

The billing rate is the amount a company charges a client for an employee's time. This differs from the salary rate which is what the employee actually gets paid. The difference between these two rates is used to cover a variety of expenses including payroll taxes and benefits, office overheads, hiring costs, and profit needed to keep the business running. A too low billing rate will cause the company to lose money on every hour worked. A too high billing rate can result in missed opportunities for work.

This calculator has three applications: it allows you to calculate the billing rate, profit margin and profits from a given markup. It also calculates the billing rate and required markup when a desired profit margin is provided. Alternatively, freelancers or consultants can use their desired income to determine what rates they should be charging.

Pay rate versus billing rate

The pay rate is the actual salary. The billing rate is what will be charged on an invoice. In staffing business, the billing rates must cover not only the salary but also three types of costs: legal cost to hire (social security), operating cost (administration and staff for hiring) and profit. Even if a worker receives an hourly pay rate of $15, it's unlikely that the billing rate will be $15. A common billing rate could be $22 or $23 but this difference doesn't cover all costs and profit.

The three components that make up the billing rate are:

To facilitate understanding, it is helpful to clarify the individual components before starting the calculation. The terms used in the calculator are as follows:

The markup and profit margin are different.

This is where most people get confused. The markup is based on the cost to be paid while the margin is based on the amount billed. If a 50 percent markup is applied to an hourly rate of $15, then $7.50 will be added to the base rate, and the billable rate would be $22.50.. Looking at the same $7.50 as a breakdown of the billable amount of $22.50,, we get a margin of 33 percent instead of 50 percent. If overhead is not taken into account, then the conversion formulas are:

This calculator also takes into account the income tax so it will show both the original difference that exceeds the hourly wage and the actual gross margin available, i.e. the amount actually available. So a 50% markup with a 12% income tax shows as a gross margin of 25%. This is lower than the simple conversion of 33%. The following table shows the pure relationship between both values when there is no income tax to be paid.

Example calculation:

Let's say you hire an administrative assistant who makes $15/hour. With a payroll tax rate of 12 percent, your direct labor costs are as follows:

Since you have set a markup of 50 percent, the rate charged is as follows:

The gross profit is found by subtracting the cost to employees from the billing rate. This means that we take $16.80 away from $22.50, which gives us a gross profit of $5.70. To find the percentage of the billing rate, we divide $5.70 by $22.50, which gives us a gross profit margin of about 25.3 percent. The $5.70 per hour is used to cover administrative costs, compensation for staffing agencies and to provide for profit. If the markup rate were reduced to 30 percent, then the billing rate would be reduced to $19.50,, the gross profit would be $2.70 and the profit margin would be about 13.8 percent. This shows how quickly a small change in the markup rate can alter the actual amount left over.

Pricing based on target profit margin:

If you are looking for a staff gross profit margin of 25 percent and the labor cost for this employee is $$16.80, then you need to calculate the billing rate that will ensure this profit margin.

In the Target Margin Mode this exact calculation is performed and also displays the markup rate contained in the price. This allows staffing agencies to use a single markup rate for onsite estimates while still maintaining their company's profit margin.

Setting hourly rates for freelance employees and consultants:

Freelancers face a different facet of the same problem. They know how much they want to earn and need an hourly rate that will allow them to meet this goal. The problem is that not every hour worked can be billed. Time is needed for administrative tasks, marketing, and vacation. So the desired income has to be divided by the actual billable hours and a factor multiplied to cover overheads and profit.

A common method for a quick calculation is to use the number of full-time working hours (2,080) as a base and apply a factor of about 4. If you want to earn $90,000, then dividing $90,000 by 2,080 gives an hourly cost of approximately $43.27. Multiplying this by 4 gives a billing rate of around $173 per hour. As the billable hours are reduced to a more realistic level, the hourly rates will increase as the same revenue has to be achieved with fewer working hours.

How much is a typical surcharge for personnel services?

The markup varies widely depending on the industry, risk and degree of tightness in the labor market. For temporary or contract workers, the markup is usually between 20% and 75%. Long-term positions often have different pricing models, with a one-time fee of 10% to 20% of the new employee's annual salary being common. More risky jobs will increase the cost of labor, which will generally be reflected in a higher markup. In industrial occupations, workers' compensation insurance is more expensive, while healthcare requires additional testing and background checks. IT salaries tend to be higher but require less training. These factors should serve as a starting point for determining whether your prices are realistic in your market.

Common Pricing Mistakes

Two common mistakes that quietly eat into your profit margin are forgetting to include overhead costs and underestimating the amount of work involved. If fees for staffing agencies, software or administrative tasks aren't included in your mark-up, then while the gross profit figure shown by your calculator will be correct, it's already been eaten up before you turn a profit. For example, if 10 percent is assumed as an employment cost but actual benefits and workers' compensation costs are closer to 20 percent, then the amount of revenue generated per hire will be less than what was expected in the spreadsheet. Base your prices on the total cost involved, including all overheads, not just salary.

This calculator is for general informational and educational purposes only and does not constitute financial, tax or legal advice. Actual labor costs, taxes and competitive rates will vary by profession, location and applicable law. Have your figures reviewed by a qualified accountant or advisor before making an offer or signing a contract.