As an independent professional, determining your rates is one of the most important yet confusing parts of running your business. You need to set rates that allow you to earn a profit while remaining competitive. But between pay rate and bill rate, it’s easy to get lost.
In this comprehensive guide, we’ll break down the key differences between pay rate and bill rate to help you set informed rates for your services.
What is Pay Rate?
Your pay rate is the base hourly or project rate that you actually get paid. It’s the amount that gets deposited in your bank account and that you pay taxes on
For example, if your pay rate is $50 per hour, and you work 10 hours in a week, you would earn $500, minus taxes.
When negotiating with a client, your pay rate is the bottom line amount you need to earn per hour or project to meet your income goals.
What Impacts Your Pay Rate?
Your pay rate should be based on a few key factors:
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Your cost of living: Consider your basic living expenses, debt payments, savings goals, etc. Determine the minimum income you need to earn.
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Your industry and specialization: Research standard pay rates for your field and services. Factor in your unique skills and experience.
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The client and project scope: Complex projects and high-paying clients warrant higher rates. Adjust for project size and client budget.
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Your experience level The more experienced you are the higher rates you can command. Newer professionals often start with lower rates.
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Rates of competitors: Look at the average hourly or project rates of other people who offer similar services to make sure your pay rate is fair.
What is Bill Rate?
Your bill rate is what you actually charge clients per hour or project. It’s the amount on the bill you send them before any taxes or other fees are taken out.
For example, if your bill rate is $75 per hour, and you work 10 hours, you would charge the client $750 total.
Your bill rate factors in what you need to earn (your pay rate) plus extra to cover your business costs and profit margin.
Calculating Your Bill Rate
To determine your bill rate, first establish your desired pay rate. Then add:
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Self-employment and income taxes: Estimate 25-35% on top of your pay rate to cover taxes.
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Business expenses: Add at least 10-20% to cover costs like insurance, software, marketing, professional fees, etc.
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Profit margin: Decide on a profit percentage, often 15-30%, that allows you to grow your business.
Let’s look at an example:
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Desired pay rate: $50/hour
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Estimated taxes (30%): + $15
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Business expenses (15%): + $7.50
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Profit margin (20%): + $10
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Total bill rate: $82.50/hour
So with a $50 pay rate, this professional would charge clients $82.50/hour.
Key Differences Between Pay Rate and Bill Rate
Here are some key things to note about pay rate vs. bill rate:
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You negotiate pay rate with clients, but bill rate is what you unilaterally set.
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Pay rate is pre-tax income; bill rate is total billed to clients.
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Pay rate covers your costs and desired earnings. Bill rate includes extra markup for business expenses and profit.
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You want to maximize bill rate within market rates. But you may negotiate pay rate based on client budget.
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Tracking time x pay rate shows income earned. Tracking time x bill rate shows revenue billed.
Setting the Right Rates for Your Business
Determining your pay rate and bill rate involves finding the sweet spot between three key elements:
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Profitability: Your rates must cover your costs and financial goals.
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Competitiveness: Your rates should align with competitors’ rates for similar services.
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Client value: Your rates should reflect the value clients gain from your unique expertise.
When starting out, it’s fine to begin on the lower end of market rates as you gain experience. But focus on raising your rates over time as you deliver results for clients.
Be confident in pricing your services commensurate to their value. Educate clients on the expertise you provide and the results you can achieve for them.
Developing pricing that works takes financial planning, research, and testing different rates with clients. Define rates that allow you to operate a thriving, sustainable business in the long-term.
Key Takeaways on Pay Rate vs Bill Rate
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Pay rate is what you take home and earn. Bill rate is what you charge clients.
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To determine rates, estimate taxes, expenses, and profit needed on top of your desired pay rate.
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Bill rate should factor in the value you provide, not just time spent.
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Monitor overhead costs and adjust bill rate accordingly over time.
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Consider your pay rate the minimum to accept; negotiate client bill rates, not your underlying pay rate.
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Clearly communicate rates upfront so clients understand your pricing model.
Setting your independent professional rates involves balancing multiple considerations. But taking the time to determine competitive and profitable pay and bill rates will ensure your business thrives. Maximize what you earn while providing clients outstanding service and value.
Determine the contract worker’s pay rate
The largest part of the contract bill rate is what the contract worker will be paid on an hourly basis. Therefore, the pay rate is a good starting point when calculating a proposed bill rate.
You can ask an experienced contract worker what their expected pay rate is. You can usually determine whether that is reasonable based on their education, experience, skill set, etc.
If your candidate is new to contracting, figure out how much someone in a similar position earns. You can find competitive salary ranges by looking at the United States Bureau of Labor Statistics. Once you have a salary, you can convert salary wages to an hourly pay rate. To do so, divide the salary by the average number of working hours per year, which is 2,080. This does not take overtime into consideration.
Keep in mind that other factors affect a worker’s hourly pay rate, including:
- Assignment length: Short-term contracts generally demand higher pay rates
- Conversion potential: The pay rate can be closer to a direct salary if the position is likely to convert
- Benefits: The pay rate might be lower if the worker receives generous benefits like health insurance and retirement plans
Apply a multiplier (mark-up)
Once you have determined the hourly pay rate, you can use an average multiplier to calculate the company’s bill rate. As of May 2021, the current average multiplier is 1.56 (or 56%). Multipliers vary based on factors like location and industry.
When you decide on the mark-up, multiply it by the contract worker’s hourly pay rate to come up with the proposed bill rate.
Let’s say you want to pay a contract worker $45.00 per hour. Use the average multiplier of 1.56 to find your bill rate:
$45.00 (Hourly Pay Rate) X 1.56 (Multiplier) = $70.20 (Bill Rate)
You would bill your client $70.20 per hour.
How Recruiters Can Calculate Staffing Bill Rates
FAQ
What is a bill rate in staffing?
What is the difference between bill rate and labor rate?
What is the difference between billable rate and actual rate?
What is a bill rate?
Bill Rate Definition: the amount a company or professional charges per hour of work. In other words, bill rate is the amount independent professionals charge clients pre-taxes, fees, and discounts. It factors into the costs you need to cover to make your target income. This rate is the foundation on which you build your business.
What is the difference between pay rate and Bill rate?
Pay rate is the amount of money workers are paid per hour, week, etc. Bill rate is the amount a company or professional charges per hour of work. Bill rate and pay rate are easily confused, but they both factor into the decision of how much you should charge for your services as an independent contractor, consultant, freelancer, etc.
How much does a bill cost per hour?
Use the average multiplier of 1.56 to find your bill rate: $45.00 (Hourly Pay Rate) X 1.56 (Multiplier) = $70.20 (Bill Rate) You would bill your client $70.20 per hour. What does the mark-up cover?
What is a pay rate?
Pay rate is how much you pay the contract worker. It does not include other costs of employing the worker like taxes and insurance, or your recruiter fees (profit). Determining your bill rate might seem intimidating, but it doesn’t have to be. First, let’s look at what makes up the hourly bill rate: