How to calculate your contractor hourly rate

You picked your rate the way most people do: you heard what the guy down the road charges, rounded it to something that sounded fair, and started quoting. Two years later you are booked solid and money is still tight every quarter when the estimated tax payment comes out.

The rate was a guess, and the fix is arithmetic. Here is the calculation, with dollars in it.

The formula

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

Four numbers. Three of them people guess low, and the fourth — billable hours — breaks the whole thing.

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. Ask your agent whether your personal policy covers a truck used for work at all — business use is commonly excluded or limited. Commercial coverage on a work pickup runs into the thousands a year alone, and rates swing hard by state.
• Workers' comp. The premium depends on your state, your trade's class code and your payroll: roofing costs multiples of what interior finish work does. Many states exempt a sole proprietor with no employees, several require it anyway for licensed construction trades, and your GCs can require it regardless. Price it with your state's comp bureau or an independent agent.
• 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. Don't take a number off any article for this one, including this one. The enhanced marketplace subsidies expired at the start of 2026 and premiums rose sharply. What you pay depends on your age, your state, your plan and whether you still qualify for a premium tax credit. Pull a real quote from healthcare.gov or your state exchange.

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

You owe self-employment tax, which funds Social Security and Medicare on your net self-employment earnings, plus income tax on top — and state income tax in most states, though nine of them do not tax individual income at all. Some cities add their own on top of that.

Nobody can hand you the percentage. It turns on your net profit, filing status, deductions, entity type, and whether an S-corp election makes sense at your income level. Your accountant runs it once and it holds for a year. Two things you can count on: it is large, and it does not wait until April. The IRS splits the year into four payment periods, due around April 15, June 15, September 15 and January 15, and those estimated payments cover self-employment tax as well as income tax. Form 1040-ES is the federal worksheet and voucher.

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. When one person does the field work and the office work, this is rarely under a quarter of clocked time and often well over a third.

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

Rules of thumb for a full-time solo operator land anywhere from roughly 1,000 to 1,600 billable hours a year, and the spread is that wide because trade, season, travel distance and paperwork all move it. Nobody can tell you yours. Track two weeks honestly and you will find it.

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.

If the guy down the road advertises $65, one of four things is true: he bills more hours than you, runs a leaner truck, makes real money on materials, or is quietly eating the difference.

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 roughly 250 hours a year 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

A rate only helps if it reaches the customer. Save the number once as a service in DoneQuote and it lands on every estimate, so the $85 you calculated is the $85 that goes out — not whatever you rounded to at 9 p.m. If your prices already live in a spreadsheet or PDF, upload it and DoneQuote reads them into your catalog.

Quick recap

• Rate = (overhead + pre-tax income) ÷ billable hours
• Use your own tracked billable hours — a rule of thumb is roughly 1,000 to 1,600, never 2,080
• 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