How to calculate your contractor hourly rate

Calculate your contractor hourly rate by adding annual overhead to the pre-tax income you need, then dividing by the hours you can actually bill. Use your own costs and tracked time; the example below shows how the calculation works for a solo business.

Calculate the hourly selling rate

Hourly rate = (Annual overhead + Pre-tax income you need) / Billable hours per year

The billable-hours estimate matters as much as your costs: fewer paid hours must recover the same annual total.

Step 1: Total your annual overhead

Everything it costs to keep the business running before you pay yourself a dime. For a one-person trade business running one truck:

Treat those as starting brackets, not benchmarks. Four lines swing hardest:

• Commercial auto. Get a quote for your actual business use and check the coverage with your agent. Include the premium in your own vehicle budget.
• Workers' comp. Ask your state workers' compensation agency and insurer what your business must carry. Price the actual trade, payroll and coverage your contracts require.
• Licensing. Who needs a license, at what job-dollar threshold, and what it costs to keep are all state and often city rules. Some trades need nothing; others need a state license, a bond, a city registration and continuing education. Your state licensing board is the only reliable source.
• Health insurance. Use the premium and expected out-of-pocket cost for the coverage you choose. Do not copy a national average into your budget.

Total your own twelve months from bank and card statements, not a range from a table. This example uses $28,000.

Step 2: Decide what you need to take home

Not what you would like. What has to land in the personal account: mortgage or rent, groceries, the car that is not the work truck, savings.

This example uses $5,500 a month, so $66,000 a year after tax.

Step 3: Gross it up for tax

For a sole proprietor, the federal calculation generally includes income tax and self-employment tax on net earnings. State and local obligations depend on where you operate. Your entity type and other household income also affect the result. Use the IRS self-employed tax guidance and ask your tax preparer to calculate your own allowance.

Revisit that allowance when profit or household circumstances change. Estimated payments may be required during the year; Form 1040-ES supplies the federal worksheet and payment instructions. A percentage used in a pricing example is not a tax calculation.

This example assumes a 30% total tax load — arithmetic, not a rule.

$66,000 / 0.70 = $94,286 pre-tax income needed

Step 4: Count billable hours, not working hours

This is where the rate gets built or wrecked. A full-time year is 2,080 hours. You will not bill 2,080 hours, and pricing as though you will is how a busy contractor ends up broke.

Start subtracting:

• Two weeks of vacation, one week of holidays, one week of weather or sickness — 48 weeks left
• Non-billable time inside the week: driving between jobs, material runs at 6:45 a.m., writing estimates, chasing invoices, going back for the callback. Track that time rather than assigning every worked hour to paid labor.

Take 45 clocked hours a week and 33% non-billable — an example, not your number — and you bill about 30 hours a week.

48 weeks × 30 hours = 1,440 billable hours

Track both paid work and unpaid business time across busy and slow periods. Two weeks gives you a starting measurement; a seasonal business needs a longer record before treating that as an annual forecast.

Run it end to end

Overhead              $28,000
Pre-tax income        $94,286
Total                $122,286

$122,286 / 1,440 hours = $84.92

Call it $85 an hour. On these assumptions that rate covers overhead and taxes and leaves $5,500 a month in your pocket. It does not cover materials. Markup is a separate number sitting on top, and there is no industry standard for it: quoted "averages" move with the trade and the job type, and often mix whole-job markup with materials-only markup. Pick yours from your own costs.

A lower advertised rate does not reveal another business's costs, billable hours or total job price. Compare like-for-like scope, then decide whether you can deliver it profitably.

What people leave out

• Retirement. No employer match is coming. A SEP-IRA or solo 401(k) contribution belongs in Step 2, not in "someday."
• Unpaid drive time. An hour a day of windshield time is 240 hours across 240 working days you worked for free. Either bill it or price it into the rate.
• Callbacks and warranty work. Every trade has them. Budget the hours or they come straight out of profit.
• The tax bill you already spent. Money in the account in March is not yours if the April payment is due.
• Slow season. If January is thin, the rate has to carry January.

Put the rate where it gets used

Save your calculated selling rate as a service in DoneQuote, then select it for the work it covers. You can import an existing price list into the catalog. Review imported prices and each draft before sending; a saved rate is a starting point, not a guarantee that every quote uses the right hours or service.

Quick recap

• Rate = (overhead + pre-tax income) ÷ billable hours
• Use your own tracked billable hours — use 2,080 only if all 40 hours in every week are billable
• Get the tax percentage from your accountant, not from a blog
• Materials markup is a separate number
• Rerun the math every year — insurance and truck costs do not hold still