Key takeaways
- Overhead is indirect: it supports the whole business, not one client or product.
- Overhead rate = total overhead ÷ an allocation base, such as billable hours or direct labor cost.
- Knowing your overhead per billable hour helps you price work so every job covers its share.
- Most overhead is a deductible business expense, but it’s still worth trimming.
What is overhead?
Think of overhead as the cost of being open for business. A freelance designer’s overhead includes software, a laptop’s yearly cost, insurance and the hours spent on invoicing and email. A plumber’s includes the shop, the office phone, insurance and the van when it’s not on a job.
Direct costs, by contrast, belong to one job: the parts for this repair, the stock photos for this client. Overhead is the rest. It’s a large slice of most operating expenses.
Keep overhead in check by tracking every bill with the Manage Receipt app.
Types
Same every month: rent, insurance, software subscriptions, loan payments.
Moves with activity: card fees, shipping supplies, utilities in a busy season.
A base plus usage: phone plans with overage, metered internet, part-time admin.
Overhead is also grouped by function: administrative (accounting, office), selling (ads, website) and manufacturing (factory utilities, equipment upkeep). See fixed and variable costs for how to classify each receipt.
Overhead rate formula
Overhead rate = Total overhead ÷ Allocation base. Service businesses usually divide by billable hours or direct labor cost. Product businesses often use units made or machine hours.
Example
A two-person design studio adds up one month of overhead receipts:
| Overhead item | Monthly cost |
|---|---|
| Studio rent | $2,000 |
| Software subscriptions | $400 |
| Accountant | $350 |
| Insurance | $250 |
| Internet and phone | $200 |
| Total overhead | $3,200 |
They bill 160 hours a month, and their direct labor cost on client work is $8,000.
- Per billable hour: $3,200 ÷ 160 = $20 of overhead per hour.
- As a share of direct labor: $3,200 ÷ $8,000 = 40%.
If their labor costs $50 an hour, each billable hour really costs $70 before profit. Charging $75 leaves only $5 an hour. That’s a pricing problem, not a sales problem.
Reducing overhead
- List every recurring expense and cancel subscriptions nobody has opened in 60 days.
- Switch to annual plans for tools you’ll keep, if the discount is worth paying upfront.
- Compare insurance and phone plans once a year.
- Share or sublet space you don’t use every day.
- Automate admin work like receipt filing and expense reports, so billable time isn’t spent on paperwork.
Cutting overhead raises profit on every job at once, which is why it’s often faster than finding new clients. Recalculate your overhead rate every quarter, and again whenever you sign a new lease or add a staff member, so your prices keep up with your real costs.
See your true monthly overhead
Manage Receipt groups rent, software, insurance and utility receipts into categories, so a monthly report shows total overhead in one place. Bill reminders flag recurring charges before they renew, which makes it easy to spot subscriptions worth cancelling.
Explore AI Expense ReportsFrequently asked questions
How do you calculate overhead?
Add up all indirect costs for a period, such as rent, insurance, software, utilities and admin salaries. To get an overhead rate, divide that total by an allocation base like billable hours or direct labor cost. For example, $3,200 of overhead over 160 billable hours is $20 per hour.
Is rent overhead?
Yes. Rent is one of the most common overhead costs because it supports the whole business rather than one client or product, and you pay it whether you’re busy or not. It’s a fixed overhead cost and is generally a deductible business expense.
What is a good overhead rate?
There’s no single right number. It depends on your industry, size and pricing. What matters is that your prices cover direct costs plus overhead and still leave a profit. Track your rate monthly and watch the trend; a rising rate with flat revenue is a warning sign.
Is overhead the same as operating expenses?
Not exactly. Overhead is the indirect part of operating expenses. Operating expenses can also include costs you can trace to specific work, such as a subcontractor on one client project. In small businesses the two overlap heavily, and people often use them interchangeably.