Updated November 1, 2026 for the 2026 tax year
Margin vs. markup
Margin is profit as a share of the selling price. Markup is profit as a share of your cost. A job that costs $60 and sells for $100 has a 40% margin but a 66.7% markup. Same dollars, different percentages.
| Markup on cost | Resulting margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 66.7% | 40% |
| 100% | 50% |
Why it matters
If you want a 40% margin and add 40% to your cost, you actually land at about 28.6%. On a year of sales, that gap is real money. When someone says "we run 40%," ask whether they mean margin or markup.
The formulas
- Margin = (price − cost) ÷ price
- Markup = (price − cost) ÷ cost
- Price for a target margin = cost ÷ (1 − margin)
What to include in cost
For a product, that's what you paid for it plus shipping in. For a service or job, include materials and the labor you pay for that job. Overhead like rent and insurance usually comes out of the gross margin, so your margin needs to be big enough to cover it and still leave profit.
Common questions
What's a good profit margin?
It depends on the industry. Service and trade businesses often target higher gross margins than retailers because labor and overhead are larger. Compare against your own overhead first: your margin has to cover it.
How do I convert markup to margin?
Margin = markup ÷ (1 + markup). A 50% markup is 0.5 ÷ 1.5 = 33.3% margin.
Sources: IRS Rev. Proc. 2025-32 (2026 inflation adjustments), Social Security Administration 2026 wage base, IRS Publication 505 and Form 1040-ES.