Calculating Hourly Rates for Employees

The first step to calculating the hourly rate for your employees is understanding whether they will be classified as hourly or salaried employees. This is an important legal distinction that will help your home service business stay out of trouble with labor laws. A salaried employee is paid a predetermined amount that is paid out in equal portions each pay period, while an hourly employee is paid (you probably guessed it!) a predetermined sum for each hour worked.

Another important distinction to consider is that of full time employees vs independent contractors. If a worker is an employee, you as the employer are responsible for withholding income taxes and pay social security, medicare taxes and unemployment tax on wages paid to an employee. If the worker is an independent contractor, the employer is not usually required to withhold or pay the same taxes. According to the IRS, there are 3 factors that determine whether your worker is an employee or an independent contractor and they are: control over behavior, financial control, and relationship of the two parties.

Control Over Behavior:

Refers to the level of control the business has over the way that a worker goes about their job. While a business has control over the end result with both an independent contractor and an employee, with employees, a business might give more detailed instructions the process of work. For example, a business might instruct an employee about where and when to work and particular tools that must be used. In the case of an independent contractor, these more specific details would likely be decided by the worker themself, with an agreed upon end result. Additionally, if you provide a great deal of training on techniques or protocols for your workers, they are likely employees.

Financial Control:

Just as with behavior, independent dent contractors are more financially independent compared with employees. Independent contractors are generally free to seek additional external business opportunities, while employees may work solely for one business. This also means that independent contractors could experience either a profit or a loss on a particular project, where's employees are guaranteed a profit and have less expenses that could potentially go unreimbursed. Perhaps the largest financial difference between employees and independent contractors is that employees are guaranteed a wage based on a certain amount of time worked and independent contractors are generally paid by the specific task.

Relationship of Parties:

The relationship between the business and the worker is a key factor in determining if a worker is an independent contractor or an employee. Employees may receive additional benefits such as sick pay, paid vacation, health insurance, etc. While these extras are not generally characteristic of independent contractor relationships. The planned duration of the relationship is another component in determining independent contractor vs. employee relationships. If the relationship has an indefinite time horizon that extends beyond a particular project etc. then it is likely an employee relationship as independent contractors are generally hired for specific amounts of time or specific projects.

One of the most important pieces of legislation for an employer to understand is The Fair Labor Standards Act (FLSA). A worker is classified as either “nonexempt” or “exempt” under the FLSA, which means that they are either owned overtime wages or not, respectively. The Fair Labor Standards Act indicates that if an employee is classified as “nonexempt” they must be paid at least the federal minimum wage, 1.5x their regular hourly rate for all time worked that exceeds 40 hours per week, as well as other provisions depending on industry and other factors.

Understanding the FLSA

The Fair Labor Standards Act (FLSA) was passed in 1938 but has seen many changes over the years. As it currently stands, the FLSA primarily outlines regulations regarding minimum wage, overtime pay, child labor, and recordkeeping.

Key points to know:

  • Salaried employees receive a fixed wage, but they must keep up with their responsibilities and complete necessary tasks—even if that means working extra hours.
  • Hourly employees must be paid time and a half for any hours beyond 40 worked during a week.
  • In the U.S. the Fair Labor Standards Act determines whether or not employees can be paid a salary or must be paid hourly.


In order to understand which classification of worker your employees may fall under, you need to understand the basic regulations regarding salary vs hourly pay. In addition to the brief bullet points above, salaried workers must generally make at least $684 per week which translates to $35,568 per year. They must also perform duties that require independent judgement at least 50% of the time. Tasks that may count as exercising independent judgment include administrative functions etc.

Requirements for employee healthcare coverage is also another consideration to think about when hiring employees. If you are a business with 50 or more employees who work at least 30 hours a week, you must provide employee health care coverage.

Setting your rates

When setting your rates for hourly employees (some salaried employees may be exempt), you must keep in mind national minimum wage laws as well as minimum wage laws for your state and city.

In order to attract and retain quality employees you may want to do some research into going rates for the particular jobs you are hiring for in your area as some geographic regions are more competitive than others. The U.S. Beuro of Labor Statistics provides a good resource of wage data by area and occupation for over 800 occupations, so this may give you a general ballpark to work with.

Below we have created a chart that gives a general hourly rate for entry level employees in various home service industries.

Average Entry Level Employee Rate

Creating Loyalty and Worker Retention

As any business owner knows, an important factor in keeping your business running smoothly and managing financial outsets is reducing worker turnover. There are various factors that may contribute to a high worker turnover that may not necessarily be related directly to wages. Workers may be drawn away from your company if they feel that their skillset is better respected or utilized elsewhere, for example. However, there are incentives you can take to increase worker retention that go beyond outright pay.

Pride in their work:

A great way to increase worker loyalty to your business is to develop a work environment where workers take pride in what they do. This can be done through the way that you communicate with workers about the job that needs to be done. Try giving workers "ownership" over certain tasks and ask them about their input on how to best accomplish them. You may also want to consider getting your crew uniform shirts or other gear that not only helps our company appear more professional, but will likely create a sense of camaraderie among workers.

Lunches & Events:

Showing your workers you appreciate them can take many forms, and it doesn't always have to break the bank (and shouldn't!). A relatively low cost option to show workers that you care about them and to create a productive bonding experience is to throw a worker appreciation lunch. Ordering a few pizzas and organizing a time for everyone to get together can go a long way. Another thing to condor is throwing a small get together for workers and their spouses or family members. Events like this can help to create a sense of family among workers and deepen friendships beyond just work associations.


Another factor workers consider when deciding between potential employers are benefits such as paid vacation, sick pay, health insurance, bonuses, etc. Before interviewing employees, consider whether you have it in the budget to offer these sort of additional perks to employees. You may also want to consider opportunities for advancement from entry level roles to encourage employees to view your company as part of their long term career plan.

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