How to Calculate Your Hourly Rate as a Contractor (Step by Step)

By Jeff, Jobsite Forms Company · Updated 2026-10-21 · 6 min read

Prefer to watch? The video covers the same steps.

Most contractors set their rate by asking around. Somebody charges $65, somebody else charges $80, so you land somewhere in the middle and hope it works out. The trouble is that the guy down the road has a different truck payment, a different insurance bill and maybe a paid-off shop. His number was built on his costs. Yours has to be built on yours.

This guide walks through a simple five-step method. You'll need about 30 minutes, your last few months of bank and card statements, and a calculator.

The five steps

1. Add up your yearly overhead.
2. Decide what you need to take home.
3. Set aside money for taxes.
4. Figure out how many hours you can actually bill.
5. Divide, then add profit on top.

We'll use one example the whole way through. The numbers are made up, so swap in your own as you go.

Step 1: Add up your yearly overhead

Overhead is everything it costs to stay in business whether you're on a job that day or not. Go through your statements line by line. People almost always miss things here, so be thorough.

• Insurance: general liability, commercial auto, tool coverage, workers' comp if you carry it.
• Vehicle: truck payment, fuel, maintenance, tires, registration.
• Phone and software: cell plan, accounting software, estimating apps, website.
• Tools: repairs and replacements. Drills and saws wear out, and that's a business cost.
• Licenses and fees: contractor license, bonding, trade association dues.
• Office and marketing: business cards, ads, yard signs, a bookkeeper or tax preparer.

Add up a typical month, multiply by 12, and add any once-a-year bills. In our example, overhead comes to $24,000 a year.

Materials you buy for a specific job don't go here. Those get billed to that job, usually with a markup. Overhead is the cost of keeping the lights on.

Step 2: Decide what you need to take home

This is the line people skip, and it's the most important one. If your own pay isn't built into the rate, you end up working for whatever is left at the end of the month, and some months that's nothing.

Pick a real yearly number you need to live on: mortgage or rent, groceries, health insurance, the kids, some savings. Be honest with yourself. In the example we'll use $60,000.

Think of it as your salary. It isn't profit. Profit comes later and belongs to the business.

Step 3: Set aside money for taxes

When you work for yourself, nobody withholds taxes from your pay. Self-employment tax covers both halves of Social Security and Medicare, and on top of that you owe federal income tax and, in most states, state income tax. Your rate has to cover all of it.

The right number depends on your state, your deductions and how your business is set up, so this is a good question for your tax preparer. For the example we'll set aside $20,000.

Add the three together:

That's what the business has to bring in each year just to break even and pay you what you decided you need.

Step 4: Count your real billable hours

This is where most rates go wrong. A lot of people divide by 2,080, which is 40 hours times 52 weeks. Nobody bills 2,080 hours.

Start with the weeks. Take off two weeks of vacation, a week of holidays, a week for being sick, and a week or so for weather and slow spells. Call it 44 working weeks. At 40 hours a week, that's 1,760 hours on the clock.

Now take out the hours nobody pays you for: driving between jobs, picking up material, writing estimates, answering the phone, invoicing, chasing payments, and walking jobs you don't win. For a small outfit that can easily be a third of the week or more. If 40 percent of your time is unbillable, 60 percent is billable:

If you've never tracked this, track it for two or three weeks. Write down every hour and mark whether a customer is paying for it. The result usually surprises people.

Step 5: Divide, then add profit

That's your break-even rate. At $98.48 you cover your costs, pay yourself and pay your taxes, but the business itself makes nothing. There's no money set aside to replace the truck, ride out a slow winter, or hire help.

So add profit. A 10 percent margin is a common starting point. Here's the catch: to get a 10 percent margin, you divide by 0.90. You don't multiply by 1.10.

Multiplying by 1.10 gives you $108.33, which is only about a 9 percent margin. On one hour that's a dollar. Over a year of hours it adds up. If the difference between markup and margin is fuzzy, our markup vs margin guide explains it in plain terms.

Gut-feel rate vs real rate

Say you'd been charging $65 an hour because it felt fair. Over 1,056 billable hours, that brings in about $68,640. The year needed $104,000 just to break even. You'd be roughly $35,000 short, and that gap usually comes out of your own pay, your savings, or a credit card.

Nobody notices it in a single week. It shows up at tax time, or the day the truck needs a transmission.

Common mistakes

• Using 2,080 hours. Use your real billable hours.
• Leaving out your own pay. If it's not in the rate, you don't get paid.
• Forgetting taxes. April will remind you.
• Mixing up markup and margin. Divide by (1 minus the margin); don't multiply.
• Setting it once and never touching it. Insurance and fuel go up. Redo the math at least once a year and any time a big cost changes.

"That's higher than everyone around here"

If $110 sounds high for your area, keep a few things in mind:

• You don't have to quote by the hour. Use the hourly rate behind the scenes to price whole jobs. The customer sees a job price, not an hourly number to compare.
• Put the scope in writing. A clear estimate showing exactly what's included makes a price easier to accept than a number on a napkin.
• The cheap guy may not last. Plenty of underpriced contractors burn out or go under. Your rate is what keeps you in business.
• Cut unbillable time. If you can't raise the rate, raising billable hours does the same job. Fewer supply-house runs and faster estimating both count.

Turning your rate into job prices

Once you know your hourly number, build a simple price book. For each job you do often, estimate the hours, multiply by your rate, add material with markup, and round. Do it once and you stop pricing every call from scratch. Your quotes also get more consistent, and customers notice that.

Quick recap

1. Overhead + your pay + taxes = what the year has to cover.
2. Divide by real billable hours, not 2,080.
3. Divide by 0.90 for a 10 percent margin.
4. Redo it every year.

Frequently asked questions

Should a handyman use the same method?

Yes. The steps are the same for a one-person handyman business and a small crew. Handymen often have even more unbillable time, from short jobs and more driving, so be realistic in step 4.

This guide is general business information, not tax or financial advice. Your numbers and tax situation will be different, so check with a tax professional.