How to Set Your Hourly Rate as a Contractor

Ask ten contractors how they set their hourly rate and you'll hear a lot of "I charge what the other guys charge" or "I took what I made at my old job and added a bit." That's how many skilled tradespeople end up busy all week and still short on money at the end of the month.

Your hourly rate has to cover much more than your time on the tools. This guide shows US contractors and service businesses how to calculate an hourly rate from the ground up: what you need to earn, what it costs to run the business, how many hours you can actually bill, and how to sanity-check the result against your market.

Why "what I made as an employee" doesn't work

When you worked for someone else, your employer covered a long list of costs you never saw: the truck, fuel, insurance, tools, the office, the phone, half of your Social Security and Medicare taxes, paid holidays, and all the hours you spent driving between jobs. Now you pay all of it.

If you made $35 an hour as an employee and charge $45 as an owner, you may well be taking a pay cut.

The basic formula

Your minimum hourly rate is:

(What you need to pay yourself + business overhead + profit) ÷ billable hours per year

Each piece is worth working through carefully.

Step 1: Decide what you need to pay yourself

Start with the annual income you need personally, before taxes, to cover your household and savings. Then remember that as a self-employed person you generally pay self-employment tax on top of income tax. Self-employment tax covers Social Security and Medicare: 12.4% for Social Security (up to the annual wage base, which is $184,500 for 2026) plus 2.9% for Medicare, figured on 92.35% of net earnings (IRS Form 1040-ES; IRS: Self-employment tax).

You'll also generally need to make quarterly estimated tax payments if you expect to owe $1,000 or more when you file (IRS: Estimated taxes). Your accountant can help you set a realistic personal pay target that accounts for taxes.

Step 2: Add up your overhead

Overhead is everything it costs to keep the doors open, whether or not you're working on a job today. List it by year:

• Truck or van payment, insurance, fuel, maintenance and registration
• Tools and equipment, plus replacements and repairs
• General liability and other business insurance
• Licenses, permits, bonds and continuing education
• Phone, internet and software subscriptions
• Marketing: website, Google ads, yard signs, truck wrap
• Accounting, bookkeeping and legal fees
• Shop or storage space, if you have one
• Uniforms, safety gear and small consumables
• Health insurance and retirement savings you fund yourself

Pull a year of bank and card statements to get real numbers rather than guesses. Most owners underestimate overhead the first time.

Step 3: Add a profit margin

Profit is not the same as your pay. It's what the business keeps after paying you and covering costs, and it's what pays for a new truck, a slow winter or your first hire. Many owners build in a percentage on top of pay plus overhead. The right number depends on your trade, your risk and your goals, but leaving it at zero means every surprise comes out of your own pocket.

Step 4: Estimate your real billable hours

This is where most rate calculations go wrong. A full-time year is about 2,080 hours (40 hours × 52 weeks), but you won't bill anywhere near that:

• Holidays, vacation and sick days
• Driving between jobs and to the supply house
• Estimates and site visits that don't turn into work
• Paperwork, invoicing, bookkeeping and phone calls
• Callbacks and warranty work you don't charge for
• Weather days and slow weeks

Track a few typical weeks honestly. Many owner-operators find that only a little more than half of their working hours are billable, though your number will differ.

Step 5: Run the numbers

Here's a worked example using made-up figures. Replace every number with your own.

Item	Example amount
Owner pay target (before income tax)	$70,000
Overhead (truck, insurance, tools, phone, marketing, software, etc.)	$28,000
Profit (10% of pay + overhead)	$9,800
Total to recover	$107,800
Working hours per year (46 weeks × 45 hours)	2,070
Billable share (example: 60%)	1,242 hours
Minimum hourly rate	about $87/hour

Example figures only, for illustration.

Notice how much the billable share matters. At 50% billable, the same costs require about $104 an hour. At 70%, about $74.

Step 6: If you have employees, include the labor burden

An employee costs much more than their hourly wage. On top of pay, employers generally owe their share of Social Security (6.2%) and Medicare (1.45%), federal and state unemployment taxes, and workers' compensation insurance where required, plus any benefits you offer (IRS Publication 15). Add paid time off and non-billable hours, and the true cost per billable hour can be far above the wage. Charge for employee time based on that full cost, not the wage alone.

Step 7: Check it against your market

Your calculated rate is your floor: the minimum you need to stay in business. Then look outward:

• What do established competitors in your area charge?
• Do you have a specialty, certification or reputation that justifies more?
• Are you consistently booked out weeks ahead? That's often a sign your rate is too low.
• Are you losing most jobs on price alone? Check your quoting process before you cut.

If the market rate is well below your floor, you may need to cut overhead, raise your billable share, specialize or rethink your service mix. Charging less than your floor just means working for free.

Hourly vs. flat-rate pricing

Many service businesses quote a flat price per task instead of showing an hourly rate to customers. Even if you price that way, your hourly number is the foundation: it's what you use to build flat rates that actually cover your costs. Revisit it at least once a year and whenever a big cost changes, like a new truck or insurance renewal.

Keep your rate consistent on paper

Once you've set your rate, make sure it shows up correctly on every quote and invoice. Saving your standard labor rate and common services in your invoicing app keeps pricing consistent across jobs and team members. In SnipInvoice you can save items with their price and whether tax applies, and a spoken job can pick up the saved price (you still check every line before the invoice is created).

FAQ

How do I calculate my hourly rate as a contractor?

Add what you need to pay yourself, your annual overhead and a profit margin, then divide by the hours you can realistically bill in a year. Compare the result to your local market and treat it as your minimum.

What percentage of my time is billable?

It varies widely by trade and business. Track several typical weeks, counting driving, estimating, admin and callbacks, to find your own number. Don't assume 40 billable hours a week.

Should I charge more than my competitors?

If your costs require it, or if you offer something they don't, such as faster response, specialized skills or better warranties, yes. Price below your calculated floor and you lose money on every hour.

How often should I raise my rates?

Review your rate at least once a year, and whenever major costs change. Small, regular increases are usually easier for customers to accept than large, rare ones.

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