How to Calculate Your Billable Hourly Rate [Step-By-Step Guide]
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How to Calculate Your Billable Hourly Rate [Step-By-Step Guide]

Post Author - The Toggl Team The Toggl Team Last Updated:

Every freelancer and small service-based business owner knows their income hinges on how they price their services. 

But how do you set the right price — and ensure it’s fair and profitable? 🤔

It all starts with calculating your hourly billable rate. This rate impacts your earnings, workload, and overall financial stability. 

In this guide, we’ll walk you through the step-by-step process to determine your ideal hourly rate and provide practical tips for applying it effectively. 

Let’s dive in.

What is the billable hourly rate?

A billable hourly rate is the amount a professional or a business charges clients for one hour of work. 

The real question is, how do you calculate a billable hourly rate that’s also profitable? 🤔

Let’s start with this simple s hourly rate billing formula:

Billable hourly rate formula.

 Let’s assume you already calculated labor costs, overheads, billable hours, and profit margin:

  • Labor cost = $50,000 per year
  • Overhead = $20,000 per year
  • Billable hours = 1,000 per year
  • Profit margin = 1.20 (or 20%)

Use these figures to calculate  labor costs and overhead per billable hour:

  • Labor costs / billable hours = $50,000 / 1,000 = $50
  • Overheads / billable hours = $20,000 / 1,000 = $20

Then, sum these up: $50 + $20 = $70

Finally, apply the profit margin: $70 x 1.20 = $84 

$84 is your new billable hourly rate to be profitable.  

What is a billable hour?

Billable hours are the time spent working on client projects and other work that generates revenue. These hours are charged to the client based on your billable hourly rate. 

Although a full-time employee typically works anywhere from 35-40 hours a week, not all of this time is billable. Tasks like training, internal meetings, or admin are all necessary but can’t be charged to the client, so these are logged as non-billable hours. 

This is important to consider when calculating profitability, resource utilization, and pricing models. 

How to calculate labor cost per billable hour

Labor cost is the total amount of wages paid to an employee plus benefits and payroll taxes. 

It’s the first element you need to calculate to find the most profitable billable hourly rate. Let’s say Anna’s annual salary as a full-time employee is $72,000, and she works 2,080 hours per year (52 weeks x 40 hours/week). 

However, her time off also needs to be subtracted from her annual work hours. Let’s assume she has 200 hours away each year for things like vacation, sick days, public holidays. This takes her total number of hours available to 1,880 hours ( 2,080 – 200). 

The next assumption we make is around Anna’s non-billable hours. If we estimate that 75% of her available hours are billable, this makes the calculation 1,880 x 75% = 1,410 hours. 

To calculate Anna’s labor cost per billable hour, we divide the annual salary by the number of billable hours:

Anna’s total labor cost per billable hour: $72,000 / 1,410 = $51.06

How to calculate overhead cost per billable hour

The next step in the equation is to calculate overhead costs per billable hour. 

Let’s say your business spends $180,000 annually on overheads like rent, utilities, and subscriptions. If we take Anna’s working hours from the previous example, we know she works around 1,410 billable hours per year.

This number can be added to this calculation to find overhead costs: 

total annual overhead costs / annual billable hours per employee

$180,000 / 1,410 hours

This gives us a total overhead cost per billable hour of $ 127.65. 

How to determine your profit margin

A profit margin is the money your business makes after covering all costs. 

You can adjust your profit margin based on specific costs and industry standards. 

Let’s get to grips with some important terms around profit margins:

  • Cost: The amount it costs to create a service or product.
  • Margin: The difference between the costs of your services or products and the final selling price.
  • Revenue: How much money your business generates.
  • Profit: What you’re left with after deducting costs from your revenue.

There are also two types of profit margin: gross profit margin and net profit margin. The first is the profit after direct project costs, while the second also accounts for overhead costs, labor, and taxes. 

To calculate the gross profit margin, use this formula:

Gross profit margin formula.

Let’s say you run a small business that generated $250,000 in revenue last year. The cost of goods sold, including labor and production costs, was $150,000.

In this case, the gross profit margin is:

$250,000 – $150,000 / $250,000 x 100 = 0.4 x 100 = 40%

For the net profit margin calculation, use this formula:

This time, you would consider all business expenses, including taxes and operating expenses, which make $60,000. Alongside COGS, your total business expenses would be $210,000.

So, the net profit margin is:

$40,000 / $250,000 x 100 = 0.16 x 100 = 16%. 

How do you calculate your billable hourly rate depending on your business?

Billable hourly rates will depend on many factors, including business type, operating costs, or desired profit margins.

Here’s how to calculate the billable hourly rate for two different business scenarios.

How to calculate billable hourly rate as a solo entrepreneur

Solo professionals or freelancers should focus their calculations on covering salary needs, business expenses, and profit goals. 

Here’s a quick four-step calculation:

  • Step 1: Determine your total annual costs. This includes your salary and operating expenses like rent and utilities. 
  • Step 2: Estimate the realistic number of billable hours per year. Consider vacations, sick days, and non-billable hours.
  • Step 3: Determine your profit margin goal. Set a percentage to aim for based on your industry (e.g., 20%).
  • Step 4: Calculate your billable hourly rate. Use the formula Billable hourly rate = (Total costs / Billable hours) x Profit margin

Here’s an example of how Jane, a freelance graphic designer, calculates her billable hourly rate. 

Jane’s total annual costs, including her salary and business expenses, are $50,000. She estimates she has around 1,000 annual billable hours every year and aims for a profit margin of 25%. 

She calculates her billable hourly rate using the formula:

Billable hourly rate: (Total costs / billable hours) x profit margin

($50,000 / 1,000) x 1.25 = $50 x 1.25 = A billable hourly rate of $62.50

How to calculate your billable hourly rate as a business with employees

Businesses with multiple employees must calculate billable hourly rates by considering salaries, overhead, billable hours, and profit margin. 

This is a four-step calculation process you can use:

  • Step 1: Calculate total annual costs. This includes your employees’ salaries and overhead costs, like office rent, utilities.
  • Step 2: Estimate the realistic number of billable hours per year. Calculate the total billable hours for all team members. Consider vacations, sick days, and non-billable hours.
  • Step 3: Determine a profit margin for your business. Set a percentage to aim for based on your industry (e.g., 25%).
  • Step 4: Calculate your billable hourly rate. Use this simple  formula to calculate the billable hourly rate = (Labor cost + overhead / Billable hours) x Profit margin

Let’s say a digital agency wants to determine the billable hourly rate for its team. 

They would start by calculating the overall ’ labor cost of employees, available work hours, and estimated billable hours. The agency calculates the costs as $300,000 in salaries and $120,000 in overhead costs, bringing total annual spending to $420,000. 

Next, the agency must calculate the total billable hours for all team members, considering vacations, time off, and non-billable hours. They have 5 employees and the average annual billable hours per employee is 1,500. This leaves a total of 7,500 billable hours each year. 

Finally, the agency wants to aim for a profit margin of 25%. 

All that’s left to do is plug this information into the formula: 

Billable hourly rate = (Labor cost + overhead / Billable hours) x Profit margin

Billable hourly rate = ($420,000 / 7,500) x 1.25 = $56 x 1.25 = A billable hourly rate of $70

For a business with many employees, setting different labor costs and billable rates for different team members can be difficult. 

Let’s see how Toggl Track makes it easy to add labor costs and billable rates. 

To add labor costs for project members:

  1. Open a Project from the Projects page
  2. Click on the “Team” tab. 
  3. Define Labor Cost under the ‘COST’ column for individual project members, as shown in the screenshot below.
Adding labor costs in Toggl Track.

To add different billable rates for different team members:

  1. Go to the Team’s tab on the Projects page
  2. Set billable rates for each team member
Setting individual billable rates per team member in Toggl Track.

Toggl Track offers flexible billable rate settings at five levels:

  1. Workspace (most general)
  2. Workspace member
  3. Project
  4. Project member
  5. Task (most granular)

More granular rates always override general ones, allowing for precise billing control.

Billable rate calculator

Calculating billable rates can be a lot of work and takes time.

To speed things up, we’ve created a billable rate calculator that you can use for free. 

Bill Rate Calculator in Google Sheets.

Just input your numbers—and the billable hourly rate calculator will do the rest. 

Grab the Bill Rate Calculator Sheet Link

What are some common mistakes when calculating hourly billable rates?

Here are the most common mistakes people make when calculating their hourly billable rates. 

Underestimating non-billable hours

Non-billable tasks, like administrative work or training, matter when calculating hourly billing rates. They take from the total amount of billable time even if they don’t directly generate revenue. 

However, many businesses find it difficult to track non-billable time because they lack the right tools or systems.  

Without software like Toggl Track, non-billable hours may slip through the cracks. Toggl Tracks lets users easily mark tasks as non-billable, track them, and see how much time they take. 

The Detailed Report feature shows an in-depth picture of billable and non-billable hours

Detailed Report in Toggl Track showing billable and non-billable hours.

Ignoring overhead

Overhead costs include all the expenses required to operate the business, like rent, utilities, office supplies, insurance, and software subscriptions. 

Many businesses ignore these costs when calculating the billable hourly rate because they don’t link them to products or services.  Not taking overhead expenses into account results in an unrealistic and unsustainable hourly rate, which hurts profitability in the long run. 

Underestimating expenses

Don’t forget about hidden expenses like professional development, legal costs, or financial fees. 

Track these expenses and consider them when calculating the billable hourly rate to ensure that it truly covers the full cost of doing business. 

Forgetting about taxes and benefits

For solo workers, a billable hourly rate should cover taxes, pension contributions, health insurance, and any other benefits you pay for. 

For agencies, the billable hourly rate should be comprehensive enough to cover all labor-related expenses and employee benefits

Don’t fall prey to this common oversight of forgetting about taxes and benefits—get your billable hourly rate calculations to cover them. 

Why is time-tracking data critical for profitable hourly rates?

Accurate calculations need accurate numbers, which you can easily collect with the right time-tracking software. 

Let’s see how time-tracking data and profitable hourly rates are connected:

  • Time tracking data shows the true cost of delivering your services, including direct and indirect labor costs. 
  • Time tracking identifies and quantifies non-billable hours. With this data, you can adjust your hourly rates to compensate for non-billable work and keep your calculations on the profitable side. 
  • Time-tracking data helps you benchmark the time it takes to complete tasks and projects. This historical data can be used to create more accurate and profitable hourly rates. 

Time and material vs. fixed-fee pricing

Whether you charge by the hour or use fixed-fee pricing, you need to calculate your billable hourly rate. 

Why? 🤔

For Time and Materials contracts, where clients pay for the actual time spent on a project, an hourly rate is a must-have. It helps you bill accurately, set expectations, and justify project costs. An accurate and profitable hourly rate is important in T&M contracts, where project scope fluctuations can affect the final billing amount. 

If the hourly rate is set too low, businesses risk not covering project costs or, worse, losing money. 

A billable hourly rate is also important when it comes to fixed-fee contracts. Although fixed-fee projects have a price that is agreed upon before the project begins, sometimes the final price doesn’t reflect the work required. It happens for a lot of reasons, from inaccurate estimates and poor calculations to scope creep

Knowing the internal hourly rate helps you avoid this and set a price that covers all projected labor and resource costs plus a profit margin. This is crucial because once the fee is fixed, any underestimation directly impacts your profit. 

Over to you

Calculating your billable hourly rate is as important as it is tricky. There are many costs and financial aspects to consider, which can become overwhelming. 

But when done right, calculating your billable hourly rate is the best way to cover expenses, value time appropriately, and improve profitability. 

To make your calculations easier, use this free Billable Rate Calculator and speed up the process. 

You can also use a tool like Toggl Track and see how it can:

  • Track billable and non-billable hours
  • Add labor costs and measure profitability
  • Get detailed business and employee profitability insights

Sign up for a free Toggl Track account now.

The Toggl Team

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