Setting billing rates from salary alone underprices services. Calculate the fully loaded cost of an employee per billable hour, including taxes, benefits, overhead and realistic utilization, then set the rate that delivers your target margin.
How it works
Turn salary into the true cost of an employee per paid, productive and billable hour, then set the hourly billing rate needed to reach a target profit margin.
Loaded cost = Salary + Payroll taxes + Benefits + Overhead
Available hours = Paid hours − PTO and holidays
Billable hours = Available hours × Utilization
Cost per billable hour = Loaded cost ÷ Billable hours
Billable rate = Cost per billable hour ÷ (1 − Target margin)Common uses
- Consulting, agency and professional-services pricing
- Freelance and contractor rate setting
- Internal chargeback and transfer pricing
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Annual salary | $85,000 |
| Employer payroll taxes | 7.65% |
| Benefits (annual) | $14,500 |
| Overhead allocated per employee (annual) | $18,000 |
| Paid hours per year | 2,080 |
| PTO and holiday hours | 176 |
| Billable utilization | 75% |
| Target profit margin | 30% |
| Billable rate for target margin | $124.05 |
| Fully loaded annual cost | $124,003 |
| Cost per paid hour | $59.62 |
| Cost per available hour | $65.13 |
| Cost per billable hour | $86.84 |
| Billable hours per year | 1,428 |
At $124.05 per hour, 1,428 billable hours generate $177,146 of revenue and $53,144 of profit.
Interpreting the results
- Utilization is the biggest lever: dropping from 75% to 60% raises cost per billable hour by 25%.
- Professional-services firms commonly target 60% to 80% utilization depending on seniority.
- Margin is calculated on price, not cost; a 30% margin is a 42.9% markup on cost.
Frequently asked questions
What is billable utilization?
Billable utilization is the share of available working hours spent on client work that can be billed. Professional-services firms commonly target 60% to 80%, with senior staff lower because of management and business development time.
Why calculate cost per billable hour instead of per paid hour?
Clients pay only for billable hours, so those hours must cover the cost of every paid hour, including time off, training and non-billable work. Using paid hours understates the true cost of delivering services.
What is the difference between margin and markup in rate setting?
Margin is profit as a percentage of price; markup is profit as a percentage of cost. A 30% margin requires a rate of cost divided by 0.70, which is a markup of about 42.9% on cost.
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