What does an employee really cost you per hour?

Most small businesses set their charge-out rate the same way: take the employee's hourly wage, add a margin, and get on with the job. It feels sensible. Then the year-end accounts arrive and the profit isn't where it should be.

The problem usually isn't the margin. It's the starting point. An employee on $35 an hour costs you a good deal more than $35 an hour, and not every hour you pay for is an hour you can bill.

We've built a free charge-out rate calculator that shows what an employee really costs you per hour, and what you need to charge to cover it. Here's what it takes into account, and why it matters.

The costs that hide behind the wage

The hourly wage is only the visible part. On top of it, every employee brings costs that are easy to underestimate:

• Paid time off. Annual leave, public holidays and sick leave are all paid hours where no chargeable work gets done. Four weeks' annual leave and up to 12 public holidays alone take around six weeks out of the working year.

• KiwiSaver. The minimum employer contribution rose to 3.5% of gross pay from 1 April 2026, and is scheduled to rise to 4% from 1 April 2028 (Inland Revenue).

• ACC. The employer work levy plus the Working Safer levy, charged per $100 of earnings. Rates vary a lot by industry, so use your own.

• The extras. Tools, vehicle running costs, phone, PPE, uniforms, software licences, training and recruitment. Individually small, collectively significant.

None of these show up in the hourly wage. All of them have to be recovered from what you charge.

A worked example: the $35 an hour employee

Take a full-time employee on $35 an hour, 40 hours a week. They're paid for 2,080 hours a year, or $72,800. But once you take out four weeks' annual leave, 11 public holidays falling on working days and five of ten sick days, they actually work about 1,792 hours.

	Annual cost	Per hour worked
Wages (including paid leave)	$72,800	$40.63
KiwiSaver at 3.5%	$2,548	$1.42
ACC (assumed $1.00 per $100)	$728	$0.41
Tools, phone, PPE, training and other extras	$4,000	$2.23
Total	$80,076	$44.69

So before you've paid for rent, vehicles, admin staff or yourself, this $35 an hour employee costs you about $44.69 for every hour they actually work.

And not every working hour is billable. If 80% is, the cost per billable hour rises to about $55.86.

Now compare that with the common shortcut: $35 plus 50% gives a charge-out rate of $52.50. That's below cost. The business loses money on every billable hour, before a single dollar of overheads or profit. Apply the same 50% markup to the true cost of $55.86 instead, and the rate becomes about $84 an hour.

All figures exclude GST and are illustrative only. Your numbers will differ.

Two numbers worth getting right

Billable hours. There's no official benchmark, but many small businesses sit somewhere around 75% to 85%. Travel, quoting, training, admin, rest breaks and waiting on materials all eat into chargeable time. Be honest here. Overstating billable hours is one of the quickest ways to underprice.

Markup versus margin. They're not the same thing. A 50% markup on cost gives you a 33% margin on the price. If you want a 50% margin, you need to double your cost. Knowing which one you're working with avoids a gap that's easy to miss and expensive to carry.

Your margin also has to cover more than profit. Rent, vehicles, insurance, software, accounting fees and non-chargeable staff all need to be funded from the difference between cost and price.

Run your own numbers

The Business Studio charge-out rate calculator takes a few minutes. You'll need:

• the employee's hourly rate and weekly hours;

• their leave entitlements;

• your KiwiSaver contribution rate;

• your ACC levy rate, which is on your annual ACC invoice or in MyACC for Business (add the work levy and Working Safer levy together);

• any other costs specific to that role; and

• your estimate of billable hours and your target margin.

It then shows the true cost per hour and a suggested charge-out rate to cover it. All amounts exclude GST.

If the answer is uncomfortable, that's useful information. It's far better to find out now than at year end. And if you'd like a second opinion on your pricing, staffing costs or profitability, get in touch or book a 30-minute appointment. We're happy to help you work through it.

Disclaimer: The information provided in this article is general in nature and does not constitute personalised business or tax advice.

First Published: 19/10/2026