An hourly rate is not a wage
A wage is what a person is paid for an hour of their time. A rate is what a customer pays for an hour of a business. They are different objects, and confusing them is the most expensive arithmetic mistake in small trade — usually made once, at the very beginning, and then carried for years.
Every input below is invented, and this page has no view on what any of them should be for you.
Step one: the hours you can actually bill
Start from the calendar and take away everything that is not an hour on a job.
- A full year at 40 hours a week:
52 × 40 = 2,080hours. - Four weeks off:
4 × 40 = 160, so2,080 − 160 = 1,920. - Eight public holidays at 8 hours:
8 × 8 = 64, so1,920 − 64 = 1,856. - Five days set aside for being ill:
5 × 8 = 40, so1,856 − 40 = 1,816hours actually at work. - Now the line that decides everything. Quoting, site visits for jobs that never land, invoicing, chasing payment, driving between sites and bookkeeping are all work, and none of it reaches an invoice. Suppose three-quarters of the remaining hours do:
1,816 × 0.75 = 1,362billable hours, and1,816 − 1,362 = 454hours worked and not billed.
That three-quarters is not a norm and this page makes no claim about anybody else's figure. Keep a rough tally for a month or two and you will have your own, which is the only one that matters.
Step two: what the year costs before you earn anything
Overhead is everything the business spends whether or not anyone is on a job. In this invented case: premises $9,600, insurance $2,400, vehicle running costs $4,800, tool and equipment replacement $1,800, phone, internet and software $1,140, accountant and bank charges $960, advertising $700.
9,600 + 2,400 + 4,800 + 1,800 + 1,140 + 960 + 700 = $21,400.
None of that arrives on the day you work. It arrives monthly, annually, or the week the van needs tyres, which is exactly why it goes missing from a rate.
Step three: what you want to earn
Say the target is $52,000 for the year, plus $4,000 into a pension nobody else is funding: 52,000 + 4,000 = $56,000 the business has to produce as your pay, before tax and contributions, which are not modelled here at all.
Step four: divide by the billable hours, not the calendar
Overhead per billable hour: 21,400 ÷ 1,362 = $15.71. Your own pay per billable hour: 56,000 ÷ 1,362 = $41.12. Together that is the break-even rate: 41.12 + 15.71 = $56.83. At that number the year ends exactly level — nothing for a bad debt, a mistake, a slow quarter or a new machine.
Add a margin, and note what a margin means: it is a share of the price, so you divide rather than multiply. At a hypothetical 15%: 56.83 ÷ 0.85 = $66.86 an hour.
Adding 15% on top gives 56.83 × 1.15 = $65.35, and at that price the margin left is (65.35 − 56.83) ÷ 65.35 = 13.0%, not 15%. A markup and a margin are two different sums with the same number in them.
The gap
The wage-shaped version of this sum is 52,000 ÷ 2,080 = $25.00 an hour. The arithmetic asks for $66.86, which is 66.86 ÷ 25.00 = 2.67 times as much. That gap is not greed. It is four weeks off, eight public holidays, five sick days, 454 unbilled hours, a van, a policy, premises, an accountant, a pension and a margin — every one of which an employer used to absorb silently.
Check it the other way round. At $66.86 for 1,362 hours the year takes in 1,362 × 66.86 = $91,063.32. Out of that comes your pay $56,000 and overhead $21,400, leaving 91,063.32 − 56,000 − 21,400 = $13,663.32, which is 13,663.32 ÷ 91,063.32 = 15.0% of the takings. It foots.
Unbilled hours are the most expensive line in the sum
Hold everything else and lose 100 billable hours to admin, so 1,362 − 100 = 1,262. Overhead per hour becomes 21,400 ÷ 1,262 = $16.96 and your pay 56,000 ÷ 1,262 = $44.37, a break-even of $61.33 and a rate of 61.33 ÷ 0.85 = $72.15. Those 100 hours cost 72.15 − 66.86 = $5.29 on every single hour you do bill.
What the sum does not answer
What a rate requires and what a customer will pay are two different questions, and this only answers the first. If the required number is more than anyone in your market will pay, that is genuinely useful to learn from a sum rather than from a year of accounts — and it tells you which input has to move: the target, the overhead, the hours, or the unbilled share.
The Shop Rate Calculator takes four numbers — annual overhead, billable hours a year, direct labour cost per hour, and the margin — and returns overhead per billable hour, the break-even rate and the billable rate. The hours count and the pay-per-hour figure are yours to work out first, exactly as above; nothing is built in.