How to Easily Calculate Employee Hourly Rates: A Guide and Free Tool for Service Industry Business Owners

What is an HourlyRate?

An hourly rate is the amount you charge a customer for an hour of either an employee’s or your time. This rate should cover the staff member’s salary, a portion of the company’s overhead costs, and a little extra on top that we call profit.

If you are new to this, it can be very difficult to understand, but stick around to the end of this post for a handy tool to get you started!

Why is it Important to Get Hourly Rates Right?

This is the baseline of a service business, whether you work for fixed fees or hourly rates, as I will explain in a moment. Getting hourly rates right could be the difference between running a profitable business and losing money, which could eventually lead to losing your business. Having good control over your hourly rates also allows you to make informed business decisions about the value of different tasks, as you can now assign a cost to them.

Fixed Fees

Fixed-fee work can be lucrative when done right, and many business owners often overlook hourly rates if they work on a fixed-fee basis, saying, “I don’t work on an hourly basis.”This couldn’t be further from the truth.

Let’s say your fixed-fee service that you just completed was £1,000. Yes, you’ve made £1,000 in turnover, but was it profitable? Now, let’s say you’ve calculated that the team member who completed the project has an hourly rate of £100, and they spent 11 hours completing that project. Now you can see you lost £100 for doing that work! Alternatively, they might have only spent 8 hours, in which case,well done—you’ve made a profit! This is why accurately calculating your hourly rates is vital, even if you work on fixed fees. It allows you to understand the health of any project and make necessary improvements.

Hourly Rate

Hourly rate work is self-explanatory: you wouldn’t be able to charge for your work if you didn’t have an hourly rate set. However, it is vital that the hourly rate set is accurate and represents the real costs of running your business and your required profit margins. Otherwise, you might end up losing money by the hour.

How Do I Calculate My Hourly Rate?

In theory, it’s simple. You take the cost of your salary (or the staff member you are calculating), add the portion of overheads that staff members are required to cover to their total salary cost, and divide it by the total productive hours they are expected to work within a year.

A salary for this calculation should include any employer’s NIC, PAYE, pension, and benefits you or the employee receives and should represent the total cost of that employee’s pay packet.

An easy way to calculate a portion of overheads is based on the employee’s salary. For example, if there are two employees, one earning £20,000 and one earning £30,000, the company’s total salaries would be £50,000 (£20,000 + £30,000). You can then work out the percentage of total salaries that each employee earns.

In this case,employee 1 earns £20,000 or 40% (£20,000 / £50,000). Let’s say the company’s total costs excluding salaries are £20,000. Employee 1 is required to cover 40%of £20,000, or £8,000.

Add this to their salary to get a total of £28,000. Once this is divided by their total productive hours expected for the year (the hours they are expected to send on clients projects which is chargeable), you have their hourly cost rate. Simply add your profit percentage on top, and you have your charge-out hourly rate.

To make it simple, I have included a downloadable spreadsheet in this blog post that you can use to calculate up to nine employee hourly rates simultaneously. Just enter their salary cost, days worked per week, annual leave entitlement, provision for sick leave, hours worked per week, and non-productive (overhead) hours per week inthe white rows, and the rest is done for you!

If this helps you, we would love to know!

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