Use dollars for fixed costs and a rate for variable costs
A fixed cost is entered as a known annual dollar amount because it remains broadly stable as revenue changes. A variable overhead cost is entered as a percentage because it scales with gross revenue or sales activity. Put each cost in one category only.
RateFloor adds fixed costs to the protected take-home target before reversing the margin. It includes variable overhead in the denominator beside the effective tax set-aside. This order ensures the revenue allocation closes without hiding a known bill inside a broad percentage.
Overhead model
See both cost types inside one rate
The example uses annual billable capacity as an explicit input so you can audit the division.
Worked example: $6,000 fixed and 10% variable
Start with an $80,000 take-home goal and $6,000 of fixed annual costs. A 28% tax set-aside plus 10% variable overhead leaves 62% of gross revenue available. Required revenue is ($80,000 + $6,000) / 0.62 = $138,709.68.
The variable overhead allowance is 10% of gross, or $13,870.97. The tax set-aside is $38,838.71. After those two allowances and the $6,000 fixed cost, $80,000 remains. Dividing gross revenue by 1,344 billable hours produces a $103.21 exact floor and a $104 rounded quote.
Classify by behavior, not by expense name
The same expense can behave differently in different businesses. A core software subscription with one annual price is fixed. A per-seat tool may become variable when contractors are added for client work. A contractor hired only for one project may be a direct project cost rather than general overhead. The decision depends on how the expense changes when revenue or workload changes.
Avoid the three common double counts
First, do not enter an annual software bill as fixed costs and also include it inside the variable overhead percentage. Second, do not include personal take-home spending as business overhead if the target take-home already covers it. Third, do not add a project-specific pass-through cost to the annual model and charge it again as a separate client expense.
Build a simple cost register with the annual amount, behavior, evidence source, and RateFloor treatment. Revisit the percentage after several months of actual revenue and expenses. A rounded overhead rate should summarize observed variable behavior, not become a container for costs you have not classified.
Pricing classification is not tax classification
RateFloor categories exist only to model quote economics. They do not decide whether an expense is deductible, capitalized, reimbursable, or reported in a particular tax period. Those questions follow accounting rules, contracts, and local law.
The effective tax rate is also separate from overhead. It is an editable pricing set-aside, not an expense deduction model. Ask a qualified professional when tax treatment affects a real filing or legal obligation.
- IRS: Deducting business expensesTax context only. It does not define RateFloor pricing categories.
- RateFloor methodologyFormula placement for fixed costs, variable overhead, and tax friction.