How to Calculate Your Labor Rate, Step by Step

What your hourly rate has to pay for

Your hourly rate is a price per billable hour, meaning an hour that ends up on an invoice. It is not the tech's wage with something added on top. Every hour the tech is paid for, billed or not, has to be covered by the hours that are billed.

Four things sit inside the rate:

• Loaded labor. The wage plus labor burden: employer payroll taxes, workers' compensation and benefits.
• Overhead. Rent, office staff, insurance, software, phones, marketing, accounting and everything else that keeps the doors open.
• The truck. Ownership and running costs of the service vehicle, unless you already carry trucks inside overhead.
• Profit. What's left after everything is paid. It funds equipment, slow months and growth.

The first three, per billable hour, add up to your break-even rate: the price at which the shop neither makes nor loses money on an hour of labor. Add profit and you have the rate.

The seven-step procedure

1. Start with gross pay. Multiply the hourly wage by paid hours per year. A 40-hour week for 52 weeks is 2,080 paid hours. If your techs work overtime, add those hours at time and a half; federal law requires at least 1.5 times the regular rate for hours over 40 in a workweek (U.S. Department of Labor).
2. Add labor burden. Employer Social Security and Medicare, federal and state unemployment tax, workers' comp and benefits, each figured on gross pay. The total is the annual loaded labor cost. The labor burden guide goes through each line.
3. Find worked hours. Subtract paid time off (holidays, vacation and sick days) from paid hours. Those hours are paid, but nobody works them.
4. Find billable hours. Multiply worked hours by billable efficiency, the share of worked time that ends up on invoices.
5. Spread overhead. Divide the year's overhead by the billable hours of all your field techs combined. The overhead guide shows what counts and what does not.
6. Add the truck. Divide each truck's yearly cost by the billable hours of the tech who drives it. Skip this step if trucks are already in overhead.
7. Add profit by dividing. Loaded labor, overhead and truck per billable hour add up to break-even. Divide break-even by (1 − net profit %) to get the rate.

Payroll tax and insurance figures in this guide are general information, not tax or insurance advice. Your payroll provider, insurance agent or accountant can confirm the rates that apply to your shop.

Worked example: a three-tech plumbing shop

The example uses the same inputs our calculator opens with. Wage and paid-leave figures are national data. Overhead, the profit target and the state unemployment rate are examples, not recommendations.

• Wage: $30.67 an hour, the May 2025 national median for plumbers, pipefitters and steamfitters (BLS Occupational Outlook Handbook).
• Paid time off: 8 holidays, 11 vacation days and 7 sick days, or 26 days × 8 hours = 208 hours. BLS reports an average of 8 paid holidays for private-industry workers in 2025 (BLS), and 11 vacation days after one year of service plus 7 sick days as of March 2026 (BLS).
• Billable efficiency: 65% of worked hours. This is the only measured figure we found, and it comes from a software vendor: Field Promax data from 300 HVAC companies, reported by ACHR News, showed 5.7 billable hours in an average 8.8-hour paid day. The 65% was measured as a share of paid time; applying it to worked hours, as our calculator does, gives fewer billable hours and a higher rate. Other vendor sources put the figure between 30% and 50%, using different definitions. None of them published a measurement for plumbing shops.
• Payroll taxes: Social Security 6.2% and Medicare 1.45% (IRS Topic 751); FUTA 0.6% on the first $7,000 of wages (IRS Topic 759); state unemployment (SUTA) 2.7% on the first $9,000, the Texas new-employer rate and wage base in the Labor Department's July 2026 table, used here only as an example state. The same table lists the wage base and rates for every state, DC, Puerto Rico and the Virgin Islands; new-employer rates differ from state to state.
• Workers' comp and benefits: 2.67 per $100 of payroll and 15.25% of gross pay. Both are our arithmetic on BLS's June 2026 Employer Costs for Employee Compensation for the construction industry: workers' comp of $1.10 (BLS series CMU2272300000000D) and insurance plus retirement of $6.29 per hour worked, against $41.25 of wages, paid leave and supplemental pay.
• Overhead: $120,000 a year for the whole shop (example).
• Truck: $16,719.14 a year per tech, the default in the site's truck calculator. It starts from AAA's Your Driving Costs 2026 figures for a half-ton pickup at 15,000 miles a year, with fuel at the EIA U.S. average of $4.465 a gallon, the price for Monday, September 28, 2026.
• Net profit target: 10% of price (example).

What the table shows

Look at the gap between the wage and the loaded labor line. The tech costs $38.65 for every paid hour ($80,390.62 ÷ 2,080). But only 1,216.8 of those 2,080 hours, or 58.5%, get billed, so each billable hour has to carry $66.07 of labor before overhead or the truck.

Paid time off alone accounts for part of that gap. The 208 hours of holidays, vacation and sick days cost $6,379.36 in wages at $30.67 an hour, plus burden, and produce no billable hours at all.

You can check the result the other way around. At $125.20, each tech's 1,216.8 billable hours bring in $152,343.36. That tech's full cost is $137,109.76: $80,390.62 of labor, a $40,000 share of overhead and $16,719.14 of truck. What's left, $15,233.60, is 10.00% of the revenue, which is the target.

Where to get your own numbers

Each line in the table has a better source than a national average, and most of them are already in your files:

• Wage and paid hours: your payroll register for the last 12 months, per tech.
• Paid time off: your written policy, or the holiday, vacation and sick hours actually paid last year.
• SUTA rate and wage base: the rate notice from your state unemployment agency. DOL keeps a directory of state unemployment tax contacts.
• Workers' comp: the rate for your class code on your policy's declarations page.
• Benefits: what the shop paid for health insurance, retirement contributions and any other benefits, divided by gross pay.
• Billable efficiency: hours on invoices divided by hours worked, from the same 12 months.
• Overhead: last year's profit and loss statement, leaving out field techs' wages, their payroll costs and the trucks, which have their own lines.
• Truck: your own payments or depreciation, insurance, registration, fuel and repairs, if you track them by vehicle.

Where you don't have a figure yet, you can start from the calculator's default, but treat it as a placeholder, not as a target, and replace it once you have your own number.

Why you divide for profit instead of multiplying

The profit target here is a share of the price the customer pays, so it has to be divided out: rate = break-even ÷ (1 − profit %). Multiplying break-even by 1.10 looks close, but it gives $123.95, and the profit left in that price is only 9.09% of it.

The gap grows as the target grows. For 20% net profit, $112.68 × 1.20 = $135.22, which leaves 16.67% of price as profit; $112.68 ÷ 0.80 = $140.85 is the rate that actually leaves 20%.

Put the other way, a 10% profit on price is an 11.11% markup on break-even. The markup vs margin guide has the conversion table and the same math for parts.

Owner-operator variant

If you're the only tech, there's no wage to start from. Start instead from what you need to take out of the business for your own work, and treat that as the pay line. The rest of the method stays the same.

What changes is the tax line. People who work for themselves pay self-employment tax, which the IRS describes as similar to the Social Security and Medicare taxes withheld from wage earners' pay (IRS). The rate is 15.3% (12.4% Social Security plus 2.9% Medicare), figured on 92.35% of net self-employment earnings, owed once those earnings reach $400, with half of the tax deductible when you figure adjusted gross income (IRS Topic 554).

Our calculator adds only the employer-equivalent half of that tax to cost. That keeps the owner mode comparable to the employee mode, where the shop pays 7.65% on a tech's wages. The other half comes out of your pay, the way an employee's share comes out of theirs.

Example, with every input labeled:

The $40.92 is the 75th-percentile hourly wage for plumbers in BLS's May 2025 data, picked only so the example has a number. Use your own figure.

This example carries no health insurance, retirement or workers' comp for the owner. If you pay for any of those, add them. Unemployment tax and workers' comp rules for owners depend on your state and how the business is set up. Three unemployment tax examples: Georgia's labor department lists a sole proprietor running their own business as not an employee for state unemployment tax (Georgia DOL); Florida's Department of Revenue lists services performed by a sole proprietor or partner among work not subject to its reemployment tax (Florida DOR); and California's employer guide says self-employed owners who have employees may elect unemployment coverage for themselves (EDD, DE 44). Check the rule with your own state's unemployment tax agency. If you pay yourself wages through payroll, the employee method fits better. Your accountant can tell you which applies.

If you also do the estimating, ordering and books, be honest about your billable share. Those hours are worked but not billed. The owner-operator pay guide shows the wage-versus-profit split and what a 50% billable share does to the rate.

Check your inputs against BLS wage data by trade

Run the same example shop with each trade's national median wage and everything else unchanged:

The medians come from BLS's Occupational Outlook Handbook pages for plumbers, electricians and HVACR mechanics. For plumbers who work for plumbing, heating and air-conditioning contractors, the median annual wage was $63,010, or about $30.29 an hour on 2,080 hours.

Wages spread much wider than the three medians. The lowest-paid 10% of plumbers earned less than $44,150 a year and the highest-paid 10% more than $108,420. On 2,080 hours that's about $21.23 and $52.13 an hour. With everything else from the example shop, those wages give rates of $102.68 and $176.37.

Use BLS data to sanity-check what you pay, not to set it. Your own payroll register is the real number, and BLS publishes state and metro wage estimates if you want a local comparison. In the example, each $1 an hour of wage moves the rate by about $2.38.

Common mistakes

Dividing by 2,080 hours

In the example, this one costs the most. The example tech's full yearly cost, $137,109.76, divided by 2,080 paid hours is $65.92; add 10% profit and you get $73.24. That's $51.96 an hour short of the $125.20 the same shop actually needs, because paid time off and non-billable time were left out.

Using someone else's burden percentage

A burden figure quoted without its parts tells you little. Some include paid leave and some don't, and workers' comp alone varies by class code and state. Build it from your own payroll lines.

Counting a cost twice

If the truck payment, fuel and insurance are already in your overhead number, set the truck line to zero. The same goes for drive time: if a trip charge bills it, count that time as billable, not as lost time. Counting it both ways overprices every call.

Multiplying for profit

Covered above: multiplying by 1.10 leaves 9.09%, not 10%.

Copying a competitor's rate or an average-cost page

Another shop's rate reflects its wages, overhead and billable hours, not yours. Homeowner cost guides describe prices customers paid somewhere else, not what your shop needs to charge.

Setting it once and forgetting it

Inputs change every year. The Social Security wage base is $184,500 for 2026 (IRS Topic 751) and is set year by year. Your state unemployment rate can change too. Georgia, for example, mails every active employer a rate notice each year (Georgia DOL); California's EDD mails its rate notice each December (EDD), and Florida mails its annual rate notices in mid-December (Florida DOR). Your workers' comp policy renews, and BLS publishes new wage estimates once a year. Rerun the numbers at least once a year and whenever wages, overhead or your truck count change.

What moves the rate most

In the example, billable efficiency has the biggest pull. At 60% billable instead of 65%, the rate rises from $125.20 to $135.63; at 70% it falls to $116.26. The billable efficiency guide has the full table from 50% to 75% and a way to measure your own.

The other levers are smaller per step. Each $10,000 of yearly overhead adds $2.74 per billable hour to break-even and $3.04 to the rate. Each $1 of hourly wage adds about $2.38 to the rate. If your truck costs differ from the default, the service truck cost guide shows how to build that line.

Next step

Open the labor rate calculator. It starts with this example shop, so you can replace one line at a time: your wage from payroll, your paid time off, your measured billable efficiency, the rate on your state unemployment notice, the workers' comp rate on your policy, last year's overhead and your truck costs. Then compare the result with what you charge today; if you are under, how to raise your prices walks through sizing the gap and staging the increase.