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Markup vs. margin: cost, selling price and gross profit
Markup compares the spread with cost; margin compares that spread with selling price. Keeping those denominators clear helps you read a job estimate alongside the profit shown in the books.
This guide describes common bookkeeping practice, not a legal or regulatory requirement.
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General information, not legal or tax advice.
Name the denominator before comparing percentages
In common pricing practice, markup is selling price less cost, divided by cost. Gross margin is selling price less cost, divided by selling price. A percentage quoted without its denominator can hide a pricing disagreement. Write the calculation in words on the estimate and agree which costs belong in the comparison.
Use the IRS gross-profit example as a check
The IRS illustrates net receipts of $300,000 and cost of goods sold of $200,000, producing $100,000 of gross profit. Dividing gross profit by net receipts gives 33 1/3%. That calculation measures the spread as a share of sales. It is an IRS example, not a target margin for your company.
Sources: IRS Publication 334 (2025), Tax Guide for Small Business
Understand a cost-plus factor in its reporting context
CDTFA’s grocery-store publication describes a cost-plus-markup method: add the markup percentage to the full cost percentage, then apply that factor to adjusted taxable cost. Its example combines 31.59% with 100% to obtain 131.59%. This is a specific reporting method, not a general instruction to price every job at that markup.
Sources: CDTFA Publication 31, Grocery Stores (November 2024)
Investigate a gap between pricing policy and results
The IRS says a large difference between gross profit percentage and markup policy may point to inaccurate sales, purchases, inventory or other cost figures. Review purchase coding, credits and job-cost assignments before blaming pricing alone. Compare estimates with completed work using the same cost categories.
Sources: IRS Publication 334 (2025), Tax Guide for Small Business
Keep a pricing worksheet separate from a tax calculation
A practical job review can identify materials, labor and other selected costs, the proposed selling price and the resulting spread. State whether overhead is included in the cost base. Use the worksheet to test your own assumptions; ask your CPA how the underlying accounts should be classified for reporting.
Sources: name the denominator before comparing percentages
Follow the cost behind gross profit
Read job profitability from reconciled records
Tidwell helps organize job costs and financial reports so you and your CPA can investigate the differences behind gross profit.