Bill Rate Vs Pay Rate: Key Differences
Sheena Muirden
The bread and butter of any company is the profit it makes on projects.
But how is that profit calculated and more importantly — calculated correctly? 🤔
It comes down to the essentials, like the rate a company pays its employees for their work, and the rate at which a company bills its clients.
These two rates have a name: pay rate and bill rates.
Understanding the difference between the two amounts is important as it helps to calculate a lot of other business expenses, like your direct cost of labor and gross profit margin.
Pay Rate: The amount of money an employee is paid for each hour of work they complete.
Bill Rate: The rate at which a company bills its clients for the services or products provided.
Knowing these numbers is vital for project managers and other stakeholders involved in the financial side of a business.
Let’s look at the differences between the two in more depth 👇
What is the pay rate?
The pay rate is the income an employee is paid for their work, sometimes referred to as base pay. It is calculated per hour (usually for hourly or temporary workers), week, or month.
It’s important to note the pay rate doesn’t take taxes or deductions like health insurance or social security into account.
Pay rates are usually based on experience level, the job’s required skill set, industry standards, and market demand.
For example, if a software development company hires a new developer and agrees to pay them $40 an hour, that $40 an hour is their hourly pay rate. If the developer works 40 hours a week, that equates to a pay rate of $1,600 per week.
This is the amount of money the developer will receive from the company before tax and deductions.
What is the difference between pay rate and salary?
Pay rate refers to the hourly wage an employee receives, while salary is the specific amount of money paid for work over a set period (e.g., monthly). A salary is paid regardless of how many hours an employee works.
How do you calculate the hourly pay rate from the monthly salary?
There is a simple formula to calculate the hourly pay rate from a monthly salary.
The first part of the calculation depends on how frequently you receive your salary: is it fortnightly, monthly, or yearly?
Next, you need to convert your salary into a weekly wage.
If you’re paid fortnightly, divide the salary by two. If it’s monthly, multiply your salary by 12, then divide by 52. If it’s yearly, divide it by 52. This will be your weekly salary (S) in the calculation.
Next, calculate your weekly work hours (H) using your work schedule. Most people work 40 hours a week, but this may vary if you have a flexible schedule or longer hours.
Finally, divide the weekly salary by the number of hours you work per week to give you your hourly wage (W).
Formula: S / H = W
Graph showing the formula for calculating the hourly wage.
For example, a content strategist earns $3,500 a month. We multiply $3,500 by 12 and divide the result by 52 to get $807.69, their weekly salary.
The content strategist works a 40-hour week, so we divide $807.69 by 40 to get their hourly wage: $20.19.
What is the bill rate?
The bill rate is how much an independent contractor, freelancer, or agency bills its clients.
The bill rate includes the pay rate along with overheads, profit margin, and any additional expenses. Because of this, the bill rate is higher than the pay rate.
Here’s an example.
You work as a consultant for an IT firm and your pay rate is $50 an hour. However, the firm’s hourly bill rate is $75 an hour.
This bill rate includes your $50 pay rate and an additional $25 to cover overhead and operational costs like office rent, utilities, equipment, software licenses, and administrative expenses. It also takes into account the firm’s profit margin.
If you work 20 billable hours for a client, you will receive $1,000, but the IT firm will bill its client $1,500.
What is the difference between bill rate and markup?
Bill rate refers to the rate a company invoices its clients for services or products. In contrast, markup sets the selling price of products and services above their cost price to maintain a profit.
For employee costs, cost price refers to pay rate plus overhead costs and payroll burden. The payroll burden or burden rate will vary depending on your industry, but it’s the cost of labor in addition to the pay rate.
The burden rate is usually calculated as a percentage of an employee’s pay rate and usually ranges from 1.25 to 1.4 times the employee’s salary.
For example, a healthcare staffing firm that provides services in the United States would have payroll burdens like:
Federal Unemployment Tax (FUTA)
Social Security and Medicare (FICA)
State Unemployment Insurance Tax (SUTA)
Worker’s Compensation Insurance (depends on the business – for example, a small business can expect to pay around $45 a month or $542 per year)
Imagine the staffing firm has 10 employees who each earn $5,000 per month. Each employee’s FUTA is $300, FICA is $382.50, SUTA (in California at 5%) is $250, and finally, Worker’s Compensation is $4.50, for a total burden cost of $937. This means the burden rate at this company is 18.74%.
Markup, sometimes called a multiplier, is calculated as a percentage or amount added to the cost price. It represents the margin above costs contributing to a company’s overall revenue and profitability strategy.
Markup rates vary from business to business and can be between 15% and 50% of the cost.
How do you calculate the bill rate from the pay rate?
To calculate your bill rate, gather your pay rate and markup rates. Then, calculate the bill rate using this simple formula:
Bill rate (BR) = Pay rate (PR) * (1 + Markup rate (MR))
Graph showing formula to calculate the bill rate.
Let’s assume your pay rate is $100 an hour and your markup rate is 30%. Putting these numbers into the above formula gives us this:
$100 * (1+0.30) = $130
This is your bill rate.
A similar formula can be used to calculate the direct cost of labor using the pay rate and payroll burden rate (BuR):
Direct cost of labor (DCL) = PR * (1 + BuR)
If your burden rate is 20%, that would give you a direct labor cost of $120.
Finally, calculate the gross profit margin by deducting the direct labor cost from the bill rate.
Gross profit margin (GPM) = BR-DCL
In this example, that would give us a gross profit margin of $10 for each hour billed.
Bill rate and billable hours
Billable hours are hours worked where your bill rate applies, like the time spent working on client projects.
This includes project planning and management, client work like researching, writing, coding, editing, client meetings, and project deployment.
On the other hand, non-billable hours are the time spent working on tasks not directly chargeable to a client. This could be anything from internal meetings to bookkeeping and other project proposals.
It’s difficult to keep track of billable hours without a time-tracking tool.
That’s where Toggl Track comes in 👇
Simply start the timer or manually input the time spent on a task. Then, click the dollar symbol to set the tracked time as billable.
Toggl Track screenshot.
The default bill rate is set at the workspace level, encompassing all members and projects. But, you can set the rate at a project or member level for more granular billing.
Toggl Track screenshot.
The Premium and Enterprise plans allow you to access and edit historical billable rate data. You can then apply new rates to future projects, which is ideal as you scale your business.
The bottom line
Understanding the difference between pay rate and bill rate is vital for navigating payroll, no matter the size of your company.
Correctly calculating bill rates allows you to accurately include overhead costs, and using the formulae we detailed above you can quickly calculate your other expenses and keep your profit margins healthy.
With a tool like Toggl Track, it’s never been easier to keep track of your billable hours and manage your billable rates.
With a start-stop timer, an online tracker, desktop and mobile apps, manual input, and advanced tracking features, you can keep track of your billable hours and rates and ensure accurate invoicing every time.
Sign up to Toggl Track for free and see how it can help you.
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Posted Nov 16, 2024
Compare bill rate vs pay rate and learn the key differences. Understand their impact on profitability and how to manage them.
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