Overhead Per Billable Hour: What Counts and How to Spread It

What overhead is, and what it is not

Overhead is a cost the shop pays whether or not a particular job happens, and that no single job causes. The SBA's break-even page describes fixed costs as costs for a period of time that do not change with the amount produced or sold, and lists rent or lease payments, salaries, property taxes, insurance, interest and depreciation as examples (SBA, read October 28, 2026). In a trade shop, overhead is the part of those costs that is not already in another line of the rate.

The labor rate has four lines, and each cost belongs in exactly one:

Two things never go in overhead. One is your own pay as an owner, which has its own line in the owner-operator version of the rate. The Schedule C form itself keeps it apart: the cost of labor line says not to include any amounts paid to yourself, and the wages line in the instructions says the same (IRS, Schedule C 2025; instructions). The other is profit, which is added at the end by dividing, not hidden inside a padded overhead number.

Start from last year's profit and loss

You do not need a new bookkeeping system. A sole proprietor's Schedule C lists expenses on lines 8 through 27b: advertising, car and truck expenses, commissions and fees, contract labor, depreciation, employee benefit programs, insurance other than health, interest, legal and professional services, office expense, pension and profit-sharing plans, rent or lease, repairs and maintenance, supplies, taxes and licenses, travel and meals, utilities, wages and other expenses, plus a few rarely used lines. A separate line covers expenses for business use of a home. Shops that file as an LLC, partnership or corporation have similar categories on their own returns. This is general information, not tax or accounting advice; ask your accountant how your own statements map.

Work down your own statement with these steps:

1. Take total operating expenses for the last 12 months.
2. Subtract field tech wages, and their payroll taxes, workers' comp and benefits. These are in loaded labor.
3. Subtract truck costs (car and truck expenses, vehicle insurance, vehicle loan interest and depreciation) if you use a truck line in the rate. Keep them in if you do not. Never both.
4. Subtract materials bought for jobs. On Schedule C these may sit in cost of goods sold (Part III, line 38) or in supplies (line 22), depending on how your accountant treats them, so check which.
5. Subtract your own pay, if it runs through the expense lines.
6. Adjust for next year. A rent increase, a new hire in the office or a new software contract belongs in the number now, not after it hurts.

What is left is the overhead figure. Do not make up for a thin line by rounding up; use the real numbers and let profit be its own step.

The example shop's overhead, line by line

The example shop has 3 field techs. No authoritative source gives a typical overhead for a small trade shop, so the lines below are illustrative amounts that add to the $120,000 the labor rate calculator opens with. They are an example, not a recommendation or a benchmark.

The per-hour column is each line divided by 3,650.4 billable hours, rounded to the cent, so the rounded lines add to $32.86. The total is $120,000 ÷ 3,650.4 = $32.87.

Office pay and rent are half of the total, $60,000. In this example those two lines are the ones to check first each year.

Spread it over billable hours

Overhead is paid in dollars a year, but a rate is dollars per hour. The conversion uses the billable hours of every field tech combined:

Overhead per billable hour = yearly overhead ÷ (number of field techs × billable hours per tech)

In the example, each tech has 1,872 worked hours at 65% billable efficiency, which is 1,216.8 billable hours. Three techs bill 3,650.4 hours, and $120,000 ÷ 3,650.4 = $32.87.

Why billable hours and not paid hours? Overhead has to be recovered from the hours you can invoice. Dividing by 2,080 paid hours per tech would spread the same $120,000 over 6,240 hours and give $19.23. Add that to the labor and truck lines and the rate comes up short by about $13.64 an hour before profit, because more than 40% of paid hours never reach an invoice. Our billable efficiency guide covers how to measure your own share.

The calculation changes with the denominator. Holding the same $120,000 fixed:

Real overhead does not stay fixed as a shop grows, since a bigger crew needs more office help, insurance and space, so the table shows how the arithmetic works, not what a four-tech shop spends. At 3 techs, 55% billable gives $38.85 an hour and 75% gives $28.49. Billable hours are the lever you control day to day, and the overhead line reacts to them as much as the rate does.

What a missing line costs

Suppose the shop prices without its rent and insurance, $27,600 a year. That drops overhead by $7.56 an hour ($27,600 ÷ 3,650.4), so break-even falls from $112.68 to $105.12, and the rate at a 10% net profit from $125.20 to $116.80. The rate is $8.40 an hour too low. Spread over a year of billing, the shop gives up $27,600 ÷ 0.9 = $30,666.67, which is the missing overhead plus the 10% profit that was meant to ride on every price.

The rule of thumb from the labor rate guide holds: each $10,000 of yearly overhead adds $2.74 to break-even and $3.04 to the rate in this shop.

Common mistakes

• Counting the truck twice. If vehicle costs are in overhead, set the truck line to zero.
• Putting owner pay in overhead and in an owner line. Pick one place.
• Leaving out the office. Dispatch, bookkeeping and answering phones are work the shop pays for even though no invoice shows it.
• Using a one-time number as a yearly one. A one-time equipment purchase is not a yearly cost. Ask your accountant how depreciation and loan payments show up on your statements.
• Using last year's total without adjusting. The rate is for the year ahead.
• Dividing by every employee. Divide only by field techs who bill, or the rate understates the cost of each billable hour.

Card processing fees are a judgment call. They scale with revenue, so many shops add them to the price of the job instead; the credit card fees guide shows how they cut into margin. Whichever you choose, count them once.

Next step

Pull last year's profit and loss and work the six steps above, keeping field wages, trucks and materials out. Put the result in the labor rate calculator with your own tech count and your measured billable hours, then see what the rate comes to. If the number is above what you charge, how to raise your prices walks through the next move.