How to Calculate Bill Rates Based on Wages

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Calculating the bill rate for labor will require knowledge of local taxes, including unemployment tax, Social Security and Medicare. Bill rates also depend on the required profit margin, benefits paid and an overhead estimate. The ultimate goal is to determine a figure that will yield a profit once the client receives a service.

Bill rates begin with determining pay rate. A markup over the pay rate is the most usual way of determining this rate, as most taxes are percentage based and can be adapted to fit with pay rates easily in any situation. Bill rates will normally run in the 30- to 50-percent range depending on the complexity of the work required and how difficult it is to locate a qualified candidate. Staffing agencies can charge more for hard-to-find skills, as the cost to recruit those individuals will be higher.

Consider a $20-per-hour pay rate. You have to have 1.45 percent for Medicare and 6.2 percent for Social Security. If this is a clerical position, you may add another 3 percent for state unemployment taxes. Illinois for example has a minimum of 0.7 percent of the first $12,740 in earned income for unemployment tax and a maximum of 8.4 percent. As the employer, you will have to determine if this associate would be on long assignment or short assignment and adjust your permanent bill rate accordingly. If the employer was to pay a 3 percent tax rate for unemployment tax, you would have to charge at least $22.03 to cover local taxes.

Add on the cost of benefits if you offer benefits to employees assigned at other work sites. If you offer medical and dental and the cost for a year is $5,000, you would want to build that cost into your bill rate as well. For a full-time worker, you would want to add $2.50 for each hour billed to ensure you can supply this benefit to your associate. If you offer sick time or PTO at a rate of 10 days per year, this will cost $1,600 per year, which you can build into your rate by adding about 80 cents to the bill rate. In this scenario, you would add $3.30 to the bill rate calculated for taxes. This would bring the total bill rate to $25.33 or 26.65 percent.

Determine what payment terms you will give the client, since you are essentially bankrolling another organizations payroll. The longer the terms, the higher the bill rate you need to charge. Common carrying charges are 1 percent per month for outstanding A/R. If you give 30-day payment terms, you will want to add that 1 percent into your bill rate. Determining also the administrative costs associated with processing payroll, managing timekeeping software, office staff, and other business activities will help you stay profitable. In this scenario, suppose it cost your business 25 cents per employee per hour to support that associate. Taking into consideration carrying charges and 25-cent administrative fee, you would now be at a bill rate of $25.78.

Tips & Warnings

  • Realizing a profitable bill rate is the ultimate goal. If at $25.78 or a 28.9 percent markup, it is only covering your costs, you need to bump it up in both an aggressive, but conservative fashion. If you need to make $1.50 per labor hour paid and you are in a 25-percent corporate tax bracket, you would want to present an initial bill rate of $27.78. With this bill rate, you would be able to deduct all expenses to get to a gross before taxes profit of $2.00, at a 25 percent corporate tax bracket you would then be left with an after-tax profit of $1.50 per labor hour provided. This would create a total markup-based bill rate to the client of 38.9 percent, which depending on the benefits or state unemployment tax rates for that organization could be a cost savings over what a full-time traditional employee may cost.
  • When determining the burden (taxes) for an associate, contact your local authorities, as some municipalities charge tax on temporary labor.

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