How to calculate your labor rate

Your labor rate is the most important number in your business. It shows up on every estimate, and it decides whether a busy year makes money. It is often set by copying someone else, and a rate copied from a competitor carries their overhead, their efficiency and their mistakes, not yours.

This guide builds a labor rate from the ground up:

• Pay
• Labor burden
• Billable hours
• Overhead
• Profit

It works through the math for a solo owner-operator and for an employee. Follow along with your own numbers or plug them into the labor rate calculator.

Why the wage is not the rate

Example: If you pay a carpenter $28 an hour and charge the client $28 an hour, every hour that carpenter works loses money.

What you pay beyond the wage

• Payroll taxes and insurance, on top of the wage.
• Hours the carpenter is not on a job: driving, picking up materials, rain days, holidays.
• The business itself: the truck, the tools, the phone, the insurance and the accountant.
• A profit. You need one.

Build the rate, don't multiply the wage

The rate has to cover all of it. A common shorthand is that your rate needs to be a multiple of the wage, but the multiple depends entirely on your costs. Build it instead.

Step 1: Start with the pay

For yourself: the salary you'd replace

Decide what you need to earn in a year as the owner, the salary you would need to replace if you went to work for someone else. This is your pay for doing the work, separate from the business's profit.

For an employee: the hourly wage

Start with the hourly wage.

Step 2: Add labor burden

Labor burden is what labor costs beyond the wage.

For an owner, self-employment tax comes first

For an owner-operator, the big item is self-employment tax: 15.3% (12.4% for Social Security up to the wage base, which is $184,500 for 2026, plus 2.9% for Medicare), figured on 92.35% of net self-employment earnings. Add health insurance and any retirement savings you want to fund.

For an employee, add taxes, comp and benefits

For an employee, burden includes:

• The employer's 7.65% share of Social Security and Medicare
• Federal and state unemployment taxes
• Workers' compensation insurance
• Any benefits you provide

Workers' compensation rates vary a lot by state and by trade, so use your own policy's rate, not a guess.

Step 3: Count your real billable hours

A full-time year is 52 weeks × 40 hours = 2,080 hours. You will not bill all of them.

Take out time off and unpaid work

First take out time off: vacation, holidays, sick days. Then take out working hours that no client pays for directly:

• Estimating
• Site visits for jobs you do not win
• Supply runs
• Driving between jobs
• Bookkeeping
• Callbacks and weather days

Track your time before you trust it

What remains is billable hours, and it can be far fewer than you expect. Track your own time for a month or two before you trust your number.

Step 4: Add overhead per billable hour

Add up a year of overhead

A year of overhead includes:

• Vehicle payments and fuel
• Insurance
• Phone and software
• Tools
• Accounting
• Licensing
• Advertising

Divide it by billable hours

Divide the year's overhead by billable hours. That is what each billed hour has to carry before it earns anything.

Step 5: Add profit

Add a markup for profit on top of the full hourly cost. Profit is not your pay; it is the business's return for taking risk and its cushion for slow months.

A 15% markup is about a 13% margin

If you think in margins, convert correctly: a 15% markup is about a 13% margin. The markup vs margin guide has a table.

Worked example: a solo owner-operator

Example: These are example figures for illustration, for one owner who does the work. Use your own.

Billable hours: 1,464 a year

The check: 2,080 − 80 − 48 = 1,952, and 1,952 × 0.75 = 1,464.

Annual cost to cover: $104,477.73

The self-employment tax line: 60,000 × 0.9235 = 55,410, and 55,410 × 0.153 = 8,477.73.

This is a rough planning figure. Your actual tax depends on your whole return, so confirm it with your tax preparer.

The rate: about $82 an hour

• Break-even rate: $104,477.73 ÷ 1,464 = $71.36 an hour. Charging less than this loses money on every billable hour.
• Rate with a 15% profit markup: $71.36 × 1.15 = $82.06 an hour. You might round to $82 or $85.

The gap between pay and rate is cost

Look at the gap between pay and rate. The owner earns the equivalent of $60,000 ÷ 2,080 = $28.85 an hour for a full-time year, but has to charge more than $80 an hour to get there.

That gap is not greed. It is taxes, insurance, overhead, unbillable time and profit.

Worked example: an employee

Example: You hire a helper at $24 an hour. Their labor burden, the employer's payroll taxes, unemployment insurance and a workers' compensation policy in this example, adds 25%. So each paid hour costs $24 × 1.25 = $30.

You pay for 2,080 hours a year, but the helper bills 80% of them, 1,664 hours, because of holidays, shop time and travel. So each billable hour costs 30 × 2,080 ÷ 1,664 = $37.50.

The check: 2,080 ÷ 1,664 = 1.25, and 30 × 1.25 = 37.50.

Overhead and profit still go on top

That $37.50 is before overhead and profit. Add the helper's share of overhead per billable hour and your profit markup the same way as above.

The rate you charge for the helper's time ends up well above the wage.

Worked example: a two-person crew rate

Now put the owner and the helper on the same job. Adding the helper adds overhead too: a bigger insurance policy, more tools, a second set of safety gear.

Example: Say that comes to $6,000 a year. Spread over the helper's 1,664 billable hours, that is 6,000 ÷ 1,664 = $3.61 an hour.

How each column adds up

The owner's column splits the $71.36 from before into its parts: $74,477.73 ÷ 1,464 = $50.87 of labor cost, and $30,000 ÷ 1,464 = $20.49 of overhead.

The helper's column: 37.50 + 3.61 = 41.11, and 41.11 × 1.15 = 47.28.

One crew hour costs $129.34

When both work together, one crew hour is 82.06 + 47.28 = $129.34, or $64.67 per person-hour. On an estimate, a task that takes the pair 10 hours carries $1,293.40 of labor.

Don't price both people at one rate

• At a single owner's rate per person-hour, $82.06 × 20 person-hours = $1,641.20, you overcharge.
• At the helper's rate for both, $47.28 × 20 = $945.60, you lose money on every hour the owner works.

Labor rate mistakes to avoid

• Using 2,080 billable hours. No one bills every hour of the year. Dividing overhead by 2,080 instead of real billable hours makes every hour look cheaper than it is.
• Forgetting your own taxes. As an owner, your self-employment tax and insurance are part of labor cost, not something to deal with in April.
• Leaving out the owner's office time. The evenings you spend on estimates and invoices are real hours. If they are not billable, they belong in the billable-hours math.
• Copying a competitor's rate. Their rate carries their costs. Yours has to carry yours.
• Never raising it. Costs rise every year. A rate set three years ago is a rate that has been quietly cut every year since.

Step 6: Check the rate against the market

Your calculated rate is the floor for your business. Before you use it, compare it with two things:

• Local wages for the trade. The Bureau of Labor Statistics publishes median wages by trade and metro area. If you pay far above or below the local median, it is worth knowing why.
• What similar work sells for. If your rate is well above the local market, look at your overhead and billable hours first; a truck you do not need or a low billable share pushes the rate up. If your rate is well below the market, you may be leaving money on the table.

Never cut below break-even to win work

Do not cut the rate below break-even to win work. A job priced below cost does not become profitable because you are busy.

Different rates for different work

One rate for everything is simple, and for many small contractors it is enough. But the cost of an hour is not the same on every job, and some contractors set two or three rates to reflect that.

Three kinds of work that cost differently

• Service calls and small repairs carry more unbillable time per billed hour: the drive, the parking, the supply run for one part. A higher hourly rate, or a minimum charge, covers it.
• Specialized work that needs a license, certification or expensive equipment can justify a higher rate than general labor.
• Large, steady jobs with little travel and a predictable pace can sometimes carry a slightly lower rate and still earn the same per day.

Every rate has to clear break-even

Whatever rates you set, each one has to sit above your break-even rate. A discount rate below $71.36 in the example above is not a discount; it is a loss on every hour.

Hourly rate or job price?

Even if you never show an hourly rate to clients, you still need one. A fixed job price is hours × rate + materials + other costs, so a wrong rate means a wrong price.

Turn the rate into a job price

The pricing guide shows how the labor rate fits into a full job price. The job cost calculator adds up a job from its parts.

Some trades bill by the hour directly

Some trades also bill by the hour directly, especially for repairs and service calls. Handymen often do, as the handyman industry page describes. Whether the rate is visible or not, the math behind it is the same.

Two ways to hold the rate

Contractors carry burden, overhead and profit one of two ways:

• One loaded rate. Fold burden, overhead and profit into one hourly labor rate and apply it to every task on an estimate.
• Labor at cost. Keep the labor line at cost and add overhead and profit as separate percentages on the whole job.

Both work if they are applied consistently.

Don't mix the two methods

What does not work is mixing them. Pricing labor at a fully loaded rate and then adding overhead again on top charges the client twice.

Pricing labor at the bare wage with no overhead line charges them nothing for it.

Where BuildWell gets labor rates

BuildWell starts every labor line from the Bureau of Labor Statistics median wage for that trade in your metro. Then it adds the labor overhead and labor markup you set. You can change the rate or the hours on any line.

It is a starting point grounded in local data, not a replacement for knowing your own numbers. That is why the settings are yours to change.

Labor rate checklist

• Owner pay or employee wage
• Labor burden from real payroll and insurance figures
• Billable hours, tracked rather than assumed
• Overhead per billable hour, updated at least yearly
• Profit markup on top of the full cost
• A comparison with local wages and market rates

Work through the list once with real numbers, and every estimate after that starts from a rate you can defend.