Bill Rate vs. Pay Rate: Differences, Examples, and Calculation

The world of financial jargon is filled with mystifying terms. Some of these may seem the same but have considerably different meanings and serve very different purposes, such as bill rates and pay rates.

Of course, it is essential to understand these differences, whether you are an employee or an independent contractor, as these play a vital role in helping you understand how your employer or client is paying you. Businesses also use these rates for various other financial calculations, such as profit margins and labor costs.

Without further ado, let’s take a deeper look at these two terms and their differences.

What is Bill Rate?

The bill rate is the amount that a professional or an organization charges its clients for its services.

For any organization or professional, the bill rates will include the pay rates along with other costs and expenses, overheads, profit margins, etc. As a result, the bill rates are almost always higher than the pay rate for that individual. Pay rates also generally account for a significant portion of the bill rates.

What is Pay Rate?

The pay rate is the amount that an employer pays to an employee or an independent contractor for their work. It may also be referred to as the base pay and is typically calculated on a per-hour basis. However, some organizations may choose to calculate their pay rates on a weekly or monthly basis, depending on their needs and preferences.

Taxes or deductions, such as insurance, are typically not considered when calculating the pay rate. Of course, various aspects, such as the industry standards, an individual’s experience level, required skill set, market demands, and individual expectations, can influence the pay rate that an employee or a contractor receives.

An Example of Bill Rate vs. Pay Rate

To properly understand the difference between pay rates and bill rates, consider the following example.

Say an individual works as a consultant in a professional services organization. The organization pays the individual $100 per hour. However, the organization will bill the same individual to its clients at a rate of, say, $150 per hour.

The bill rate here includes the individual’s $100 pay rate. The remaining $50 is meant to cover the operational costs and overheads borne by the organization, such as equipment, admin expenses, office rent, etc. It also covers the profit margins that the organization expects to make.

What is the Overtime Pay Rate?

According to the Fair Labor Standards Act (FLSA), nonexempt employees are required to get overtime pay for any hours worked beyond 40 hours in a workweek. The overtime rate, as decided by FLSA, is a minimum of 1.5 times their normal pay rate. However, some US states have overtime laws that can require organizations to pay a greater amount of overtime pay. Of course, organizations are free to pay an overtime rate greater than the minimum defined by FLSA.

What is the Difference Between Pay Rate & Salary?

The pay rate typically refers to the amount of money an employee gets paid per hour. On the other hand, the salary is a fixed amount of money paid to employees for work over a specific period, generally a month. Salaries are paid irrespective of the number of hours the employee works.

What is the Difference Between Bill Rate & Markup?

As mentioned above, the bill rate is the amount that an organization charges its clients in return for its services. The markup is a percentage of the bill rate that establishes the selling price of the organization’s services and/or products above the cost price. The markup helps the organization achieve its profit.

The cost price here is determined by adding the pay rate to the overheads and the payroll burden. The payroll burden, or, as it is sometimes referred to as, the burden rate, is the cost of labor incurred by the organization. It consists of the different taxes and insurances that the organization needs to bear, depending on the regulations and laws it needs to follow.

For example, a staffing organization operating in the United States will have payroll burdens under regulations like Federal Unemployment Tax (FUTA) and Social Security and Medicare (FICA).

The markup, in short, contributes to the organization’s overall revenue and profit margins. The markup will vary depending on various factors, such as industry and location, but it can be as much as 50% of the costs incurred.

How do you Calculate the Bill Rate From the Pay Rate?

To start calculating the bill rate for an employee, you first need to determine markup rates and the applicable pay rates. Then, you can start calculating the bill rates with this formula.

Bill Rate = Pay Rate x (1 + Markup)

If the pay rate is $100 per hour and the markup is set at 40%, then the resulting bill rate would be as follows.

Bill Rate = $100 x (1+0.40) = $140

How to Calculate the Rate of Pay From Salary

There are fundamentally three easy steps to calculate your hourly rate of pay from your salary. These steps are as follows.

Step 1: Calculate Pay per Week

To start, you need to first determine your annual gross pay. This is the amount of money that you earn before your employer removes the taxes and other deductions from your salary. Then, take the annual gross pay and divide it by 52, which is the number of weeks in a year. This gives you your estimated weekly salary.

Step 2: Calculate Hours Worked per Week

Next, you need to determine the average number of hours you work per week. This is easier if you work a fixed number of hours, typically 40 hours per week in the US. If the number of hours tends to vary, it is a good idea to average it over a certain period. For example, you can work out the average number of hours worked per week for 2 or 3 months.

Step 3: Calculate the Hourly Pay Rate

Now that you know your average hours worked per week and your estimated weekly salary, you can easily calculate your hourly rate of pay. Just divide the weekly salary by the number of hours and you will arrive at your approximate hourly rate of pay.

Differences Between Bill Rates and Pay Rates

As seen above, bill rate and pay rate might seem similar at first glance, but they serve two different purposes.

	Bill Rate	Pay Rate
Description	Bill rates are the amount that organizations charge their clients per hour or for another set period.	The pay rate means the amount that a worker earns per hour or another set period.
Usage	It is used to calculate the organization’s revenue and profit margins.	It determines the salary of the worker.
Factors That Affect the Rate	Pay rates, taxes, admin costs, and the organization’s profitability goals, etc.	Work experience, skill set, certifications, labor market conditions, and job location, to name a few.

How to Streamline Bill Rate and Pay Rate Calculations With Software

Using bill rates and pay rates for calculations manually can pose a significant challenge for organizations. This is particularly true for organizations that work on multiple projects and have a large workforce. However, it is possible to overcome these challenges with a robust solution, like Deltek | Replicon.

With Deltek | Replicon’s project time tracking solution, organizations can easily define bill rates for each employee for each project with minimal effort. This allows organizations to quickly process the project’s billables for faster and more accurate client invoicing. Additionally, employers can leverage Deltek | Replicon to automate gross pay calculations and export the data to their preferred payroll solution to ensure they pay every employee as per the correct pay rate.

Conclusion

Understanding key financial terms such as bill rates and pay rates is crucial not only for employers to provide accurate pay and stay compliant with labor laws, but also for employees. Knowledge of these terms and how they relate to their wages or salary can help employees or contractors determine whether they are getting paid correctly or if they must seek better opportunities.