How to Calculate Your Hourly Rate as an Owner

Add the pay you want the business to leave you to the overhead the business costs to run, then divide by the hours you can actually invoice in a year. That is the whole formula. The first two inputs are easy to look up and almost nobody gets them badly wrong. The third one, billable hours, is the input that decides the answer, and it is the one owners guess. Plan on 40 hours a week and the arithmetic quietly hands you a rate roughly half of what the same target needs at 15 or 20 real billable hours. Below, one identical take-home target is run through three honest billable-hour assumptions so you can see how far the required rate moves, then a method for measuring your own ratio instead of borrowing a default.

Every input in the worked example is invented for illustration. None of it is an average, a benchmark, or a figure you should expect to match. The point is the shape of the calculation, not the numbers in it.

What does the standard hourly rate formula assume?

The version of this calculation you will find nearly everywhere was built for a salaried employee, not an owner. It divides an annual salary by a fixed number of hours in a working year, and that fixed number is almost always 2,080: 52 weeks multiplied by 40 hours.

That divisor is a real convention with a real basis. The U.S. Office of Personnel Management uses a slightly different one and explains why in its fact sheet on computing hourly rates of pay using the 2,087-hour divisor. A calendar year is 365 or 366 days, not exactly 364, so the number of workdays drifts year to year. Averaged across the 28-year cycle over which the calendar repeats, a full-time year works out to 2,087.143 hours, and federal hourly rates are computed on 2,087 rather than 2,080.

That is a precise answer to a question owners are not asking. Both 2,080 and 2,087 describe hours an employee is paid for. Paid time and billable time are the same thing for an employee and are nowhere near the same thing for someone running their own business. An employee paid for 2,080 hours is paid for the staff meeting, the training day, the hour spent fixing the printer, and the annual leave. You are paid for none of that.

So the formula itself is fine. The default plugged into it is not. Three things it assumes that do not hold for an owner:

Every worked hour produces revenue. For an employee, effectively yes. For an owner, only the hours a client is charged for.
Time off is already priced in. A salary covers holidays and vacation. Your rate has to cover them, which means the weeks you work, not the weeks in the year.
Overhead is somebody else's problem. Insurance, software, the vehicle, the phone: an employee's employer pays those out of a different pocket. Yours comes out of the same rate.

How many hours can you actually bill in a week?

Ask an owner how many hours a week they work and you will get a big number, often 50 or 60, and it is usually true. Ask how many hours a client was invoiced for in the same week and the number drops hard, because those are two different questions and the second one is the only one the formula wants.

There is no universal ratio here, and you should be suspicious of any page that hands you one with confidence and no source behind it. What is genuinely true is directional and worth saying plainly: the gap is large, it is larger than owners expect, and it varies enormously by trade. A bookkeeper working from a desk on retainer clients loses less to travel than a mobile technician who spends ninety minutes a day in a van. A business that quotes every job before winning it loses a chunk to estimating that a subscription business never sees.

Two practical consequences follow.

First, the denominator is per year, and the year is not 52 weeks. If you take four weeks off and lose a further week or so to public holidays and sick days, you are working somewhere near 46 or 47 weeks. Dividing by 52 does not just shave a little off the rate, it prices your own time off at zero.

Second, the denominator moves the answer more than anything else on the page. The pay target and the overhead figure are both lookups you can get roughly right on the first attempt. Billable hours is the one you are guessing, and it sits in the divisor, which is exactly where a guess does the most damage. If you have already read about finding break-even in billable hours per week, the same denominator problem shows up there, and getting it right once fixes both calculations.

Where do the unbillable hours go?

They do not vanish and they are not wasted. They are the cost of being the business rather than an employee of one. Written out, the list is long enough to explain the whole gap:

Quoting and estimating. Site visits, scoping calls, writing the proposal. Every job you did not win consumed this time too.
Travel between jobs. For a mobile trade this is frequently the single biggest line.
Invoicing and chasing payment. Raising the invoice, then following up on the ones that go quiet, which is its own recurring drain.
Buying and collecting materials. Supply runs, ordering, returns, waiting.
Marketing and enquiries that go nowhere. Answering the phone, replying to messages, keeping a listing current.
Admin and bookkeeping. Receipts, reconciliation, insurance renewals, licences.
Equipment and vehicle upkeep. Cleaning, servicing, repairs, replacing what broke.
Rework and warranty callbacks. The return visit that nobody is paying for.
Learning. Certifications, new products, the software you switched to.

The IRS lists monitoring the progress of your business first among the reasons to keep records at all in Publication 583 on starting a business and keeping records, ahead of anything to do with filing, and this is a concrete instance of why. Until these hours are written down somewhere, they are invisible to you and fully visible in your income.

One category deserves its own note because it is genuinely contested rather than merely forgotten: travel. See the FAQ below.

How do you turn target take-home into a rate?

Take-home is what lands in your pocket. The formula wants what the business has to produce before tax, so there is a gross-up step in between, and it is worth doing explicitly because skipping it is how a rate ends up short by a quarter.

The mechanics, in order:

Pick the take-home number. What you want the business to leave you personally, for the year, after tax is set aside.
Gross it up. Divide by one minus your tax reserve rate: take-home ÷ (1 − reserve). The reserve is a percentage you set aside from every payment.
Add annual overhead. Every cost that arrives whether or not you work: insurance, software, vehicle, phone, licences, accounting.
Work out billable hours per year. Billable hours per week multiplied by weeks actually worked.
Divide. (grossed-up pay + overhead) ÷ billable hours = required rate.

On step two, here is where the boundary sits, stated plainly. The one component that is a published figure rather than a guess is self-employment tax. The IRS puts the self-employment tax rate at 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, with the Social Security portion applying only up to an annual earnings cap and the Medicare portion applying to all net earnings. Income tax sits on top of that, and what it comes to depends on your filing status, your other income, your business structure, and deductions this article has no business guessing at. Your reserve percentage is a conversation with a bookkeeper or accountant, or a read of Publication 334, Tax Guide for Small Business. Nothing here is tax advice, and the reserve figure used below is a placeholder chosen to make the arithmetic legible, not a recommendation.

The illustrative inputs, all invented:

Input	Value	Where it comes from
Target take-home for the year	$48,000	you have to decide it
Tax reserve (ILLUSTRATIVE placeholder)	25%	set it with a bookkeeper, not from a blog
Grossed-up owner pay	$64,000	`$48,000 ÷ 0.75`
Annual overhead	$9,600	look it up ($800/month from your own records)
Revenue the year must produce	$73,600	`$64,000 + $9,600`
Weeks actually worked (ILLUSTRATIVE)	46	52 minus your own time off

That $73,600 is the numerator, and it is now fixed. Everything that happens next happens because of the denominator.

If the overhead line is the part you cannot fill in, that is a records problem rather than a maths problem, and it is the subject of tracking small business expenses without accounting software.

What does the same formula do at 15, 25, and 35 billable hours?

Same owner, same target, same overhead. The only thing that changes is the billable-hour assumption.

Billable hours/week (ILLUSTRATIVE)	Billable hours/year	Arithmetic	Required rate
15	690 (`15 × 46`)	`$73,600 ÷ 690`	$106.67/hour
25	1,150 (`25 × 46`)	`$73,600 ÷ 1,150`	$64.00/hour
35	1,610 (`35 × 46`)	`$73,600 ÷ 1,610`	$45.71/hour

The same person, wanting the same $48,000 in their pocket, needs to charge $106.67 or $45.71 depending on nothing but how much of the week is invoiceable. That is a 2.3x spread produced by one input, and it is worth sitting with before reading on.

Two things to notice in the table.

The relationship is not linear. Going from 15 to 25 billable hours takes $42.67 off the required rate. Going from 25 to 35, the same ten-hour improvement, takes only $18.29 off. Time recovered at the low end is worth far more than time recovered at the high end, which is a useful thing to know before spending a month trying to squeeze more billable hours out of an already-full week.

And the assumption most owners get wrong is the top row. Not because 15 is the right answer, but because the row people instinctively reach for is not even on this table: 40 hours a week, 52 weeks, 2,080 hours. Run the same numerator through it and you get $73,600 ÷ 2,080 = $35.38/hour, a rate that is a third of what the 15-hour scenario requires and that quietly assumes you never quote, never drive, never invoice, never buy anything, and never take a day off. An owner who sets a rate from that number is not undercharging by a little. They have built the shortfall into every hour they will work this year, and they will feel it as being busy and broke at the same time rather than as a pricing error, which is why it goes uncorrected for years.

How do you measure your real billable ratio?

You cannot reconstruct this from memory. Memory systematically overstates billable time, because the driving and the quoting and the supply run all felt like work, which they were, and the mind files them next to the work that got invoiced. The only reliable method is to log it while it happens, and one month is enough to get a usable figure.

The method:

Log every work block as it happens, not at the end of the day. Start time, end time, one line on what it was.
Tag each block billable or not. The test is a single question: is a client being charged for this specific block? Not "was it necessary", not "was it business". Charged, or not charged.
At month end, total both. Billable hours, and all hours worked.
Divide. billable ÷ total = your ratio. Multiply your usual weekly hours by that ratio and you have your real billable week.
Convert to a year. Multiply by the weeks you actually work after time off, and you have the denominator the formula wanted all along.

Three traps that spoil the measurement:

Counting a whole day as billable because you were on site. The hour spent waiting for a delivery on a client's job is not billable unless the client is being charged for it.
Leaving out the evening admin. Invoicing at 9pm is worked time. Excluding it inflates your ratio and gives you a rate that is too low.
Measuring an unrepresentative month. A quiet month has a low ratio, a flat-out month a high one. Two months apart beats one, and if you can only do one, pick an ordinary one.

The lightweight way to run this is to put each work block in as a task with a billable or unbillable label as you go, in the tasks module, and let the month accumulate. It is the same logging discipline behind valuing your own hours in job costing, and once you have the ratio it feeds both.

A closing boundary worth being explicit about: none of this tells you what to charge. It tells you what a given rate implies about the year, and what a given target implies about the rate. Whether your market will pay the number that comes out is a separate question, and if the answer is no, the levers are the ones covered in how to price your services: change the pricing structure, change the mix of work, or reduce what the year has to produce. The arithmetic will not decide that for you, but it will stop you from finding out too late.

Frequently asked questions

How many billable hours a week is realistic?

There is no honest single number, and anyone who gives you one without knowing your trade is guessing. What determines it is structure, not effort. Travel time between jobs, whether you quote before winning work, how much of your admin can be batched, and whether your work arrives in long blocks or short ones all move it more than working harder does. A desk-based business on retainer clients will land far higher than a mobile trade doing several short jobs a day, and both can be run well. The useful move is not to find the right number, it is to measure your own over a month using the method above. Until then, if you need a placeholder to make the arithmetic run, use one that is clearly too low rather than clearly too high, and treat the resulting rate as a floor you will refine.

Should travel time be billable?

That is a pricing decision, not an accounting fact, and both answers are defensible as long as you are consistent. Some trades bill travel explicitly as a call-out fee or a per-mile charge, in which case those hours belong in your billable column and the calculation handles them normally. Others fold travel into the job price, in which case the hours are unbillable and the rate has to be high enough to absorb them, which is precisely what a measured billable ratio does for you. The error is doing neither: treating travel as billable when working out your rate, then not charging for it. That puts hours in the denominator that never produce revenue and hands you a rate that cannot cover the year. Whichever way you go, pick it deliberately and make sure the hours are counted the same way in the calculation as they are on the invoice.

How do I work out my rate from a target salary?

Start from what you want in your pocket, not from an employee salary you are comparing against, because the two are not equivalent. An employee's salary sits alongside an employer's contributions, paid leave, and overhead someone else absorbs. Take your target take-home, gross it up by your tax reserve, add your full annual overhead, and divide by billable hours for the year rather than by 2,080. If you are comparing against a job you used to hold, add the value of what that job covered and you no longer have: paid time off, any insurance the employer carried, equipment, and the employer's half of payroll taxes, which for self-employment shows up as the full 15.3% rate cited above rather than a split one. That comparison usually lands well above the old salary, and it is not greed, it is the arithmetic being complete.

Why does my hourly rate feel high but my income low?

Almost always because the rate is high per billable hour while the number of billable hours is low, and the annual income is the product of the two. A rate that sounds impressive next to a wage is being applied to a fraction of the week, and the fraction is doing the work. Two checks separate the causes. First, divide the money you were actually paid last month by the hours you actually worked last month, all of them, and compare that to your nominal rate. The gap is your unbillable load in a single number. Second, check whether the shortfall is a rate problem or a volume problem: multiply your rate by your realistic billable hours for a year and see whether the answer clears your target at all. If it does not, no amount of being busy will fix it. If it does, the problem is empty slots rather than the price, and that is a different fix. The numbers worth checking every Monday will show you which one you have long before the year ends.

Sources

U.S. Office of Personnel Management, Computing hourly rates of pay using the 2,087-hour divisor, for the standard full-time-year hours convention and its derivation
Internal Revenue Service, Self-employment tax (Social Security and Medicare taxes), for the 15.3% rate and its 12.4% and 2.9% components
Internal Revenue Service, Publication 583, Starting a Business and Keeping Records, on monitoring business progress as the first purpose of records
Internal Revenue Service, Publication 334, Tax Guide for Small Business, for anything crossing into filing, deductions, or self-employment tax

Every dollar figure, the 25% reserve, the 46-week year, and all three billable-hour assumptions in the worked example are invented for illustration. They are the example's own inputs, not averages or benchmarks, and the exercise only works when you substitute your own.

Count your real denominator

The formula takes two minutes. Getting an honest billable-hours figure takes a month, and it is entirely a logging habit. Log each work block as a task in the tasks module of SMBDashboard with a billable or unbillable label as you go, keep your overhead in the money module alongside it, and at month end you will have both numbers the calculation needs instead of two guesses. It is free, there is no account to create, and your data stays in your browser unless you turn on Pro sync. The free tier holds 25 customers, 200 money entries, and unlimited tasks, which is a real month of records rather than a demo. Pro removes the caps and adds CSV export, recurring entries, and your own branding on the printed report, at $48 every six months (about $8 a month) or $149 once.