The $25/Hour Mirage
A $52,000 employee looks like they cost $25 an hour. The math seems simple: $52,000 ÷ 2,080 hours (40 hrs × 52 weeks) = $25/hr.
That number is clean. Controlled. And completely wrong.
Two assumptions are hiding the truth:
- You're not paying $52,000. You're paying more.
- You're not getting 2,080 hours. You're getting less.
When you fix both assumptions, $25/hour becomes $36/hour—or higher. That's your floor rate: the actual cost per billable hour. Anything you bill below that number means you're paying the client to take your time.
Step 1: Calculate True Cost
Salary is just the starting point. Here's what that $52,000 employee actually costs you:
| Item | Amount | Notes |
|---|---|---|
| Base Salary | $52,000 | What they see on their offer letter |
| Payroll Taxes (7.65%) | $3,978 | Social Security + Medicare (employer portion) |
| Health Insurance | $6,000 | Your contribution (~$500/mo is common) |
| Workers Comp | $1,560 | ~3% for trades, varies by industry |
| 401k Match | $1,040 | If you offer 2% match |
| Software/Tools | $1,200 | Licenses, subscriptions per seat |
| Overhead Allocation | $2,000 | Rent, insurance, admin—spread per head |
| TRUE ANNUAL COST | $67,778 |
Your numbers will vary. The point is: salary ≠ cost.
Step 2: Calculate Real Available Hours
You pay for 2,080 hours. But how many can you actually bill?
| Item | Hours | Notes |
|---|---|---|
| Paid Hours (40 × 52) | 2,080 | What you're paying for |
| PTO | −80 | 2 weeks vacation |
| Holidays | −56 | 7 paid holidays |
| Sick Days | −24 | 3 days average |
| Training/Meetings | −40 | Internal time, not billable |
| Admin/Downtime | −80 | Lag between jobs, paperwork |
| AVAILABLE BILLABLE HOURS | 1,800 |
1,800 is optimistic. Many businesses see 1,600 or less when they actually track.
Step 3: The Floor Rate Formula
That's not $25/hour. It's nearly $38/hour—and that's just to break even. No profit. No margin for error. Just survival.
Why This Matters
Let's say you bill a client $75/hour. Feels good, right? Here's what actually happens:
Scenario A: 100% Utilization (all 1,800 hours billed)
- Revenue: 1,800 × $75 = $135,000
- Cost: $67,778
- Gross Profit: $67,222 (49.8% margin)
Looks great. But 100% utilization is a fantasy.
Scenario B: 50% Utilization (900 hours billed)
- Revenue: 900 × $75 = $67,500
- Cost: $67,778 (doesn't change—salary clears regardless)
- Gross Profit: −$278 (you lost money)
At 50% utilization, your realized rate is effectively $37.50/hour ($67,500 ÷ 1,800 paid hours). That's barely above floor. Every additional hour of downtime pushes you deeper into the red.
The Culture Excuse
"Some revenue is better than none."
Not if it's below floor. At $30/hour billed against a $38 floor, every hour you work costs you $8. Ten hours of that "revenue" just cost you $80.
"Our people are salaried—they work harder than subs."
Maybe. But hard work doesn't change math. A sub only costs you when they bill. A salaried employee costs you whether they bill or not.
"We're a get-it-done shop. We don't clock hours."
The ledger doesn't care about culture. Every non-billable hour is cash out the door.
The Uncomfortable Truth: You Need to Track Time
You can calculate floor rate with the reports above. But knowing your floor rate and knowing if you're above it are two different things.
If you're not tracking time, you're guessing. You might think you're billing 1,800 hours a year per person. You're probably not.
Most owners resist time tracking because it feels like micromanagement. But it's not about watching people—it's about seeing where money actually goes. You can't fix what you can't see.
At minimum, track:
- Billable hours — time that hits a client invoice
- Non-billable hours — internal work, admin, travel, waiting
- Which client/job — so you can see which work is profitable
You don't need fancy software. A spreadsheet works. What matters is the habit.
How to Calculate Your Own Floor Rate
You don't need fancy software. You need these reports and 30 minutes:
For True Cost:
| Report | Where to Find It | What You're Looking For |
|---|---|---|
| Payroll Summary | Payroll provider (Gusto, ADP, etc.) | Gross wages + employer taxes per employee |
| Benefits Statement | Insurance broker or HR | Health, dental, vision costs per employee |
| Workers Comp Policy | Insurance carrier | Annual premium ÷ number of employees |
| 401k/Retirement | Plan administrator | Employer match paid per employee |
| Software/Licenses | Accounting system or credit card | Per-seat costs (tools they need to work) |
| P&L / Overhead | QuickBooks, Xero, etc. | Total overhead ÷ headcount = per-person allocation |
For Available Hours:
| Report | Where to Find It | What You're Looking For |
|---|---|---|
| PTO Policy | Employee handbook / HR | Days of vacation + sick time per year |
| Holiday Schedule | Company calendar | Number of paid holidays |
| Time Tracking Data | Timesheets, Clockify, Harvest | Actual billable vs. total hours logged |
Download the Resource Utilization Calculator in the Tools section of the training hub.
Bottom Line
- Floor rate = True Cost ÷ Available Billable Hours
- It's always higher than the hourly wage—often 40-50% higher
- Billing below floor = guaranteed loss, no matter how "busy" you are
- You can't set prices, evaluate jobs, or plan hiring until you know this number
What's Next
Now you know what each person costs per billable hour. But that's just survival—break-even. In Module 2: The Survival Number, we'll calculate what the whole business needs to stay alive: fixed costs, liabilities, owner's draw, and what's actually left after all of it.
Because floor rate tells you if a single hour is profitable. The survival number tells you if the business is.