Temp agencies get paid by charging the client company a higher hourly rate than they pay the worker and keeping the difference. That spread, usually built as a markup of 20% to 75% on the worker’s pay rate, has to cover employer payroll taxes, workers’ compensation, other insurance, recruiting costs, and overhead before anything counts as profit. Agencies also collect one-time fees when they place someone directly into a permanent job or when a client converts a temp into a full-time hire.
The Bill Rate and the Pay Rate
Every placement runs on two numbers. The bill rate is what the client pays the agency for each hour worked. The pay rate is what the worker actually receives. If a company is billed $30 an hour for a receptionist and the agency pays that receptionist $20 an hour, the $10 gap is the agency’s gross profit on that hour.
Both numbers are set by contract before the worker starts, and the agency’s entire business lives inside that gap. After all the costs the markup has to absorb, most agencies keep roughly 3% to 8% of the bill rate as net profit. Publicly traded staffing firms typically run a gross margin of 25% to 30%, meaning the agency retains about a quarter of the bill rate before internal expenses come out.
Markup Versus Margin
These two words get used interchangeably in staffing conversations, and they shouldn’t be. Markup is the percentage added on top of the pay rate. Pay a worker $20, bill the client $30, and the markup is 50% ($10 ÷ $20). Margin is the share of the bill rate that represents gross profit. That same $10 on a $30 bill rate is a 33% margin ($10 ÷ $30). A 50% markup sounds steep until you see it as a 33% margin, and that margin has to cover every obligation the agency owes before anyone talks about profit.
What the Markup Has to Cover
Markups of 40% to 70% are typical. That range isn’t padding. It reflects real costs the agency takes on the moment a temp clocks in, and it’s why the same agency might quote 40% on an office temp and 70% on a warehouse worker.
Payroll Taxes
The agency is the legal employer, so it pays the employer’s share of federal payroll taxes on every dollar of wages. Social Security is 6.2% and Medicare is 1.45%, a combined 7.65% before the worker sees a cent of take-home pay.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Federal unemployment tax (FUTA) is 6% on the first $7,000 of each worker’s annual wages, though a credit of up to 5.4% usually cuts the effective rate to 0.6% for employers current on their state unemployment obligations, capping FUTA at about $42 per worker per year in most states.2Internal Revenue Service. FUTA Credit Reduction
State unemployment tax (SUTA) adds another layer that varies by state, the agency’s claims history, and industry classification. Rates generally fall between 0.01% and over 10% of taxable wages. Agencies cycling through hundreds of short-term workers can rack up SUTA costs quickly, since each separation may lead to a new unemployment claim.
Workers’ Compensation
Because the agency is the employer of record, it carries workers’ comp for every temp on assignment. This is where markups diverge sharply between job types. An administrative assistant in a climate-controlled office might cost less than 1% of payroll to insure. A warehouse worker or construction laborer can cost 5% to 15% or more, depending on the state and the agency’s loss history. Agencies staffing high-risk roles build the higher premium into a higher markup, which is why industrial placements look more expensive on paper than office temps at the same firm.
Other Insurance
Most agencies also carry general liability, professional liability (errors and omissions), and employment practices liability insurance. Not every state requires them, but clients routinely demand proof of coverage before signing a staffing contract. The premiums are modest next to workers’ comp, but they’re fixed costs that the markup has to absorb whether the agency bills ten hours or ten thousand.
Health Coverage Under the ACA
Staffing agencies with 50 or more full-time equivalent employees fall under the Affordable Care Act’s employer mandate. Any temp averaging 30 or more hours per week over a measurement period has to be offered coverage that meets minimum value and affordability standards. In 2026, the affordability threshold is 9.96% of the employee’s household income, and agencies that don’t offer qualifying coverage face penalties of $2,900 or more per full-time employee per year. Providing even a basic plan adds roughly $1 to $3 per hour to the agency’s burden, depending on how many temps qualify. This cost barely existed before 2015, and many clients don’t realize it sits inside the bill rate.
Recruiting and Overhead
Recruiters need salaries. Job board postings, background checks, drug screens, and skills tests all carry per-candidate fees. The agency also pays for applicant tracking software, payroll systems, office space, and its own back-office staff. A recruiter who spends three days finding the right person for a two-week assignment brings in no revenue during the search, but the salary still runs. The eventual placement’s markup has to cover that unproductive search time too.
How Overtime Changes the Numbers
Overtime is where clients sometimes get surprised. Under the Fair Labor Standards Act, non-exempt employees must be paid at least one and a half times their regular rate for hours worked beyond 40 in a workweek.3Office of the Law Revision Counsel. 29 U.S. Code 207 – Maximum Hours The agency is the employer, so it owes the higher wage. A $20 pay rate becomes $30 in overtime hours.
The bill rate almost always follows the same 1.5x multiplier applied to the full bill rate, not just the pay rate. A $30 regular bill rate becomes $45 in overtime. The agency’s gross profit in dollars actually goes up during overtime hours, because the employer’s share of FICA also rises with the higher wage and the markup needs to absorb that. Most staffing contracts spell overtime billing out explicitly; if yours doesn’t, ask before approving extra hours.
Some agencies also apply shift differentials for night, weekend, or holiday assignments, adding 10% to 20% to both the pay rate and the bill rate to attract workers for undesirable shifts and cover the extra payroll tax that comes with the higher wage.
Direct Hire Placement Fees
When an agency recruits someone for a permanent position instead of a temporary one, the model flips. Rather than an ongoing hourly markup, the agency charges a one-time placement fee calculated as a percentage of the new hire’s first-year salary. That percentage usually falls between 15% and 25%, and it can reach 30% or higher for executive searches or hard-to-fill technical roles. A $60,000 position at a 20% fee produces a $12,000 payment to the agency.
Most direct hire agreements include a replacement guarantee. If the new employee leaves or is terminated within a set period, commonly around 90 days, the agency finds a replacement at no additional charge.
Conversion Fees
Conversion fees apply when a client wants to bring a current temp onto its own payroll before the staffing contract expires. The agency invested time and money finding that worker, so contracts usually include a buyout clause to compensate for the lost future revenue.
These fees are typically prorated based on hours already worked through the agency. The longer the temp has been on assignment, the smaller the conversion fee. Many contracts set a threshold, often around 480 to 720 hours, after which the client can hire the worker with no fee at all. Numbers vary by agency and by contract, so this clause is worth reading closely before signing. Trying to hire a temp “off the books” to avoid the fee risks a breach-of-contract claim.
VMS and MSP Fees
Large companies that use dozens of staffing vendors often centralize procurement through a Vendor Management System or a Managed Service Provider. The VMS is a technology platform that standardizes how positions are requisitioned, filled, and billed. The MSP is the company that runs the program and manages the vendor relationships.
MSPs typically charge 2% to 3.5% of the total contingent workforce spend. That fee sometimes comes out of the client’s budget and sometimes gets embedded in the supplier markup, meaning the staffing agency absorbs it. When the agency absorbs the fee, its effective margin shrinks, and it may recover the difference by tightening the worker’s pay rate. A temp working through a VMS-managed program whose pay looks below market often has this extra fee layer sitting somewhere in the stack.
What Actually Lands as Profit
After payroll taxes, workers’ comp, health insurance, overhead, recruiting, and financing costs, the net profit on a typical placement is thinner than the markup suggests. Take that same temp earning $20 an hour on a $30 bill rate. The employer’s FICA share alone is $1.53 per hour. SUTA runs roughly $0.40 to $1.00 depending on the state. Workers’ comp adds anywhere from $0.20 for a low-risk office role to $3.00 or more per hour for industrial work. ACA-driven health costs can add $0 to $2.00 per hour if the worker qualifies for coverage. Recruiting and administrative overhead usually accounts for another $1.50 to $3.00 per hour.
Add those up on a moderate-risk placement, and $5 to $8 of the $10 gross profit is already gone to hard costs. What remains, somewhere between $2 and $5 per hour, is operating profit before corporate taxes and financing costs. Multiplied across thousands of billable hours, the business works. On any single placement, though, the per-hour profit is far less dramatic than the markup percentage might suggest. Pushing the markup below the agency’s cost floor tends to backfire, because a partner that can’t afford to recruit well or absorb compliance costs rarely saves the client money over time.