Many service business owners pick an hourly rate by looking at competitors. A better way is to work backward from what you need to earn and how many hours you can really bill.
Updated 25 October 2026.
The hourly rate formula
Step 1: Set your target pay
Decide how much pre-tax profit you want from the business in a year. In this example it is $60,000.
Step 2: Add yearly business expenses
Include vehicle costs, tools, insurance, software, advertising and fees. In this example they total $12,000, so you need $72,000 of revenue.
Step 3: Count your real billable hours
- A full-time year has 40 x 52 = 2,080 hours.
- Subtract holidays, vacation and sick days: say 160 hours, leaving 1,920.
- Not all working time can be billed. Quoting, driving, invoicing and marketing take time. If 60% is billable, you have 1,920 x 0.60 = 1,152 billable hours.
Step 4: Divide
$72,000 / 1,152 = $62.50 per hour. If you also want a 10% profit buffer for slow months, multiply by 1.10 to get about $68.75.
Check the result
- Compare it with local prices for similar work. If it is far higher, find out whether you can add value or reduce your costs.
- If you hire helpers, include their full cost, not just wages. See how to calculate labor burden.
- Flat-rate jobs should be quoted from time and cost, so see markup and margin.
Set aside tax before you set the rate
Sole proprietors pay self-employment tax of 15.3% on most net earnings (12.4% Social Security up to the annual limit plus 2.9% Medicare), on top of income tax. See the IRS page on self-employment tax. Your pay target should be what you want to keep after taxes.
Example: you want $60,000 to keep and expect to set aside 25% of profit for income and self-employment tax (an assumption, so use your own figure). The pre-tax profit target is $60,000 / 0.75 = $80,000. The rate becomes ($80,000 + $12,000) / 1,152 hours = $79.86 an hour, not $62.50.
Three mistakes that lower your real rate
- Counting 2,080 hours as billable when quoting, driving and admin take a large share.
- Leaving out unpaid time off, tools, insurance and software.
- Pricing every job the same even though some take twice as long.
Hourly rate or flat price
At $79.86 an hour, a 3-hour job is $239.58. If you quote a flat $260 and finish in 2.5 hours, you earn $104 an hour. If it takes 4 hours, you earn $65 an hour. Flat pricing pays off when you estimate well, so track your real times on each job.
The hourly rate formula in Excel
- Put your after-tax pay target in B1, expenses in B2 and the tax set-aside rate in B3 (0.25).
- Weeks worked in B4, hours per week in B5 and the share of time you can bill in B6 (0.6).
- Required revenue:
=B1/(1-B3)+B2. - Hourly rate:
=(B1/(1-B3)+B2)/(B4*B5*B6).
Track hours, jobs and income together with the Home Service Business Bundle. If you hire help, add labor burden to their cost.
Use the calculator
The service business hourly rate calculator does this in a few seconds. More tools are on the free tools page.
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Frequently asked questions
How do I calculate my hourly rate?
Add your target pay and yearly business expenses, then divide by the hours you can realistically bill in a year.
Why can I not bill 40 hours a week?
Time spent on quotes, travel, admin and marketing is unpaid. Many service owners bill only half to two thirds of their working hours.
Should I charge by the hour or by the job?
Either works if you start from the same costs. Hourly pricing is simple, and flat pricing can earn more on jobs you finish faster than average.