Have Employees? Here’s How To Calculate Your Hourly Pricing Rates

The cost of labor for your company: $235,078

Your desired profit: $117,539

Your total to cover labor costs: $352,617

Payroll is your biggest expense and your biggest investment. It is also the hardest thing to take into account when you are estimating jobs and trying to figure out how to cover overhead expenses.

At first glance, the numbers above feel completely shocking, unreal, and overwhelming. Most business owners have never taken the time to calculate what their organization actually costs to operate, let alone what their pricing should be in order to create a healthy profit. Instead, pricing is often based on what competitors charge, what clients are willing to pay, or what feels reasonable in the moment

What I love about the Cost of Labor Worksheet is that it takes the guesswork out of pricing. Once you know the true cost of your organization, you can begin building rates that support your employees, your overhead, and your company goals. Instead of feeling guilty that your pricing is high enough, why you have great sales but no money in the bank, you now have data to realize you actually do need to charge more.

Annual Rate Goal

The annual rate goal represents the amount your pricing needs to support over the course of a year. This is not a sales target pulled out of thin air. It is based on the actual cost of operating your organization plus the profit you want the business to generate.

Understanding this number creates clarity because it gives every pricing decision a purpose. Rather than hoping enough money will be left over at the end of the year, you are intentionally building profit into your pricing from the very beginning. Then you personalize each job you estimate on the needs of that job (supplies, shipping, travel, etc)

Formula for Annual Rate Goal:

$235,078 Total Cost
x
50% profit multiplier ($117,539 Profit)
=
$352,617 Total Needed to cover labor costs for the year

Monthly Rate Goal

Breaking the annual goal into monthly numbers makes it easier to connect pricing with the day-to-day reality of running a business. Most financial decisions are made monthly, whether it is payroll, rent, software subscriptions, or reviewing financial statements.

When you know your business needs to generate approximately $29,385 per month to cover labor costs, you can begin evaluating whether your current pricing structure supports that goal. You can also determine how many clients, projects, or recurring contracts are needed to consistently reach that number.

Formula for Monthly Rate Goal:

$352,617
÷
12 Months
=
$29,384.75 Per Month

Weekly Rate Goal

The weekly rate goal helps translate large annual numbers into something more manageable for your team. Many business owners and employees feel disconnected from annual goals because they seem so far away. Weekly goals create a much tighter feedback loop and actually feel attainable.

Knowing your organization needs to generate approximately $6,781 each week allows you to evaluate whether the work currently scheduled supports the financial needs of the company. If it does not, you have time to adjust before a small problem becomes a larger one.

Formula for Weekly Rate Goal:

$352,617
÷
52 Weeks
=
$6,781.10 Per Week

Daily Rate Goal

This is where pricing starts becoming incredibly useful for estimating work. If your organization needs to generate approximately $1,405 each working day, you can begin evaluating projects differently.

Rather than asking whether a project sounds profitable, you can determine whether it contributes appropriately to the daily financial needs of the business. This helps business owners make decisions based on data instead of intuition alone. Plus, it will help you understand your employee’s capacity and workload. The conversation of quality versus quantity of jobs becomes a very important consideration at this point.

Formula For Daily Rate Goal:

$352,617
÷
251 Working Days
=
$1,404.85 Per Day

Hourly Rate Goal

For many business owners, this becomes the most valuable number on the worksheet. The hourly rate goal represents what the organization needs to generate for every available working hour throughout the year.

This is not an employee wage. It is not what someone on your team earns. It is the amount required to support the entire organization, including payroll taxes, workers compensation, software, equipment, administrative support, leadership, and all the other expenses required to operate the business successfully.

Once you understand this number, pricing conversations become much easier because you finally have a foundation to build from.

Formula For Hourly Rate:

$352,617
÷
2,080 Working Hours
=
$169.53 Per Hour

Turning Rates Into Estimates

Imagine a project will require ten hours of labor. Using the hourly rate goal above, the labor portion of the estimate would be calculated like this:

10 Hours × $169.53 = $1,695.30

At that point, the estimate is only partially complete because labor is only one component of pricing. Materials, supplies, inventory, permits, travel, fuel, subcontractors, and other job-specific expenses still need to be added.

The difference is that labor is no longer a guess.

You know the project is contributing appropriately toward supporting the organization. Once the additional expenses are added, you have a price that reflects both the true cost of doing business and the profit needed to continue growing.

Final Thoughts from Your Favorite Accountant

It is so hard to raise your rates without data behind them. The Cost of Labor worksheet shows you that employees, and everything that goes into hiring them, is much more than their salary. Once you see those numbers, it makes it a little bit easier to raise your prices and smooth out your cash flow.

Because at the end of the day, positive cash flow isn't luck, it's strategy. And it's my goal to make that strategy as simple as possible for you.

Download the Cost of Labor Worksheet here.