Pay rate is what you pay the person doing the work. Bill rate is what you charge the client for each hour of that work. The gap between the two has to cover everything the person costs you beyond their wage, every hour nobody pays for, and your profit. If you set a bill rate by adding a round percentage to the pay rate, you are guessing at all three at once.
This guide walks through what sits inside that gap, how to calculate a bill rate from a pay rate step by step, and why the same percentage means something different depending on whether you call it markup or margin.
Bill rate vs pay rate: the short version
The pay rate is the hourly amount a worker receives, before their own taxes come out. For an employee it is their wage. For a subcontractor it is the rate on their invoice to you.
The bill rate is the hourly amount your client pays you for that worker's time. Staffing agencies, consultancies, design and dev shops, and trade contractors with crews all run on this relationship, and so does any freelancer who brings in help on a project.
The difference between the two is sometimes called the spread. It is not profit. Most of it is cost.
What sits between pay rate and bill rate
Payroll taxes, if the worker is an employee
For an employee, the wage is only the start. The IRS sets the employer share of Social Security at 6.2 percent and Medicare at 1.45 percent, on top of the same amounts withheld from the employee. Social Security stops at a wage base limit, which the IRS lists as $184,500 for 2026. Medicare has no limit.
Then there is federal unemployment tax. According to the IRS, the FUTA rate is 6.0 percent on the first $7,000 paid to each employee in a year, and an employer who pays state unemployment tax on time can usually take a credit of up to 5.4 percent, which brings the federal rate down to 0.6 percent. State unemployment rates and workers' compensation premiums vary by state, industry and claims history, so those are numbers to pull from your own accounts rather than from an article.
Benefits
Health cover, paid leave and retirement contributions add up faster than most people expect. The Bureau of Labor Statistics measured private industry employers in June 2026 paying $32.82 an hour in wages and salaries and $14.07 an hour in benefits, with benefits making up 30.0 percent of total compensation. BLS counts legally required costs such as Social Security, Medicare and unemployment insurance inside that benefits figure, so do not add payroll taxes on top of it. Put another way, the average private employer spent about 43 cents on benefits for every dollar of wages.
That is a national average across every industry and job type. A small agency with no health plan will sit well below it, and a firm with generous benefits will sit above. Use it as a reality check on your own number, not as your number.
If the worker is a contractor
Here the picture changes. The IRS puts it plainly: generally, you do not have to withhold or pay any taxes on payments to independent contractors. So a subcontractor's pay rate carries far less burden on your side. That is also why a contractor's own rate is usually higher than an employee's wage for similar work, because they are covering those costs themselves.
Classification is not a choice you make to save on taxes. The IRS looks at behavioral control, financial control and the relationship between the parties, and an employer who treats an employee as a contractor can be liable for the employment taxes that should have been paid. If you are unsure, the same IRS page explains the tests and Form SS-8.
Hours nobody pays for
This is the cost people forget. A salaried designer is paid for time spent in internal meetings, on training, on proposals that did not land, and on leave. None of that is billable. If a person is paid for 40 hours and only 30 of them end up on a client invoice, every billable hour has to carry the cost of the other 10.
For hourly contractors you only pay for the hours they log, so this matters less. For salaried staff it is often the biggest single reason a bill rate that looked healthy turns out thin.
Overhead and profit
Software, insurance, office costs, the time you spend selling and managing: all of it has to be recovered from billable hours too. Whatever is left after that is profit, and it is usually a much smaller slice of the spread than it first appears.
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How to calculate a bill rate from a pay rate
The figures below are a worked example with round numbers, chosen to show the method. They are not benchmarks. Swap in your own.
Step 1: find the loaded cost per paid hour
Start with the pay rate and add the burden for that worker. Say you employ a developer at $40 an hour, and after adding up your own payroll taxes, unemployment insurance, workers' compensation and benefits you find they add 25 percent.
Loaded cost = $40 x 1.25 = $50 per paid hour.
Step 2: adjust for billable hours
If that developer is paid for 40 hours a week and bills 32 of them, divide the loaded cost by the billable share.
Cost per billable hour = $50 / (32 / 40) = $50 / 0.8 = $62.50.
Skip this step and you would price from $50, and lose $12.50 on every billable hour before overhead.
Step 3: add overhead
Take your monthly overhead and spread it over the billable hours your team produces. If that works out to $8 per billable hour, your full cost is $70.50.
Step 4: set the margin you want
To keep a 25 percent margin on the bill rate, divide the full cost by 1 minus the margin.
Bill rate = $70.50 / (1 - 0.25) = $70.50 / 0.75 = $94 per hour.
Against the $40 pay rate, that is a spread of $54 an hour, of which $23.50 is profit. Quoting $60 because it is 50 percent over the wage would have lost money on every hour.
Markup vs margin: the same number means two different things
Much of the confusion around bill rates comes from these two words being used as if they are interchangeable.
Markup is measured against cost. A 50 percent markup on a $40 pay rate gives a $60 bill rate.
Margin is measured against price. A $60 bill rate on a $40 pay rate is a margin of $20 out of $60, which is 33.3 percent.
So a 50 percent markup is a 33.3 percent margin, and a 50 percent margin needs a 100 percent markup. When a client, a staffing partner or your own spreadsheet says the rate is 50 percent on top, check which one they mean before you agree to it. The conversion is simple:
- Margin = markup / (1 + markup)
- Markup = margin / (1 - margin)
And notice what the markup in the staffing world is usually applied to: the pay rate. A markup on pay rate has to cover the burden, the unbilled hours and overhead before any of it becomes margin, which is why the markup a staffing firm quotes can look high while its actual profit is modest.
Bill rate vs pay rate for freelancers
If you work alone, you are both sides of this equation. Your pay rate is what you want to take home per hour, your bill rate is what you charge, and the gap covers your self-employment tax, your own health cover and retirement, the hours spent finding work and doing admin, and your tools. The same four steps apply, with you as the worker. For a longer look at choosing between hourly and fixed pricing once you have that number, see flat rate vs hourly rate, and for the mechanics of billing the hours, how to invoice for hourly work.
Common mistakes when setting a bill rate
- Pricing from the wage alone. The burden on an employee is real money, and it is paid whether the client pays on time or not.
- Assuming every paid hour is billable. Utilization below 100 percent is normal. Pricing as if it were 100 percent is how a busy team ends up unprofitable.
- Mixing up markup and margin. Agreeing to a margin when you calculated a markup can wipe out most of the profit on a contract.
- Using one rate for employees and contractors. Their costs to you are different, so the same bill rate produces a different result on each.
- Never revisiting it. Wages, insurance premiums and benefit costs move every year. A bill rate set two years ago may be quietly underwater.
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Frequently asked questions
What is the difference between bill rate and pay rate?
Pay rate is what a worker is paid per hour. Bill rate is what the client is charged per hour for that worker's time. The difference has to cover payroll taxes and benefits for employees, hours that cannot be billed, business overhead and profit.
How do I calculate a bill rate from a pay rate?
Add the burden to the pay rate to get a loaded cost, divide by the share of paid hours that are billable, add overhead per billable hour, then divide by 1 minus your target margin. For example, a $70.50 full cost at a 25 percent margin gives a $94 bill rate.
Is billable rate the same as salary?
No. Salary is what an employee is paid for all of their working time, billable or not. A billable rate is what a client pays for the hours spent on their work, and it needs to be high enough to cover the salary, the employer costs on top of it, and the hours that never reach an invoice.
What is the difference between markup and margin on a bill rate?
Markup is measured against cost and margin against price. A $40 pay rate billed at $60 is a 50 percent markup but a 33.3 percent margin. Always confirm which one a contract or partner means.
How much do benefits add to an employee's cost?
It depends heavily on the business. As a national reference point, the Bureau of Labor Statistics found private industry employers paid $14.07 an hour in benefits against $32.82 in wages in June 2026, with legally required costs like Social Security and Medicare counted inside the benefits figure.
Do I pay payroll taxes on a contractor's pay rate?
Generally no. The IRS says you generally do not have to withhold or pay any taxes on payments to independent contractors, which is why a contractor's pay rate carries less burden for you than an employee's wage. The worker has to be correctly classified, though, and the IRS tests look at control over the work, not at what the contract calls it.
