Operating a successful staffing agency in the United States requires a deep understanding of the intricacies involved in calculating pay rates and bill rates. As intermediaries between employers and temporary or contract workers, the staffing industry plays a pivotal role in fulfilling workforce needs across diverse industries. However, accurately determining the correct pay rate and bill rate for each shift is crucial for financial sustainability and maintaining a competitive edge in the market.

To provide you with a comprehensive understanding, we will discuss the workforce expenses for US staffing firms, whether they need to account for short-term temporary employees or for an employee's gross annual salary. Several factors, such as taxes, mandatory insurance as well as overhead costs, need to be accounted for when calculating the optimal bill rate for each shift. We will dive into terminology and help you understand the legislative obligations to achieve better profit margins for your staffing business.

Understand the Concepts

Key terms such as employee pay rate, burden rate, markup rates, bill rate, and gross profit vs. net profit are essential components that shape the financial aspects of a staffing agency's operations. By gaining a clear understanding of these terms, staffing agencies can make informed decisions when calculating a competitive bill rate and ensuring profits.

Employee's Pay Rate

This refers to the amount of employee compensation for their work on an hourly, weekly, or monthly basis. For a temporary employee, this is usually measured per hour. It is the base pay rate before any additional factors or deductions are considered, after which it will represent the employee's earnings. The pay rate is typically determined by factors such as job responsibilities, skills required, market demand, and industry standards, but it must never be less than the legally required minimum.

Payroll Burden Rate

Payroll burden, also known as labor burden, includes the additional costs incurred by employers beyond the base pay rate. These statutory expenses include taxes, benefits, insurance, and other expenses associated with employing staff. The payroll burden encompasses various factors such as social security and Medicare taxes, unemployment taxes, workers' compensation insurance, healthcare contributions, retirement contributions, and paid time off.

Markup Rates

The markup rate represents the percentage added to the direct costs of labor or services to determine the bill rate charged to clients. A staffing agency typically applies markup rates to cover its overhead costs, profit margins, and other expenses associated with providing staffing services. Permanent placement markups are usually up to 20%, while a temporary staffing agency can mark up rates to 75%.

Bill Rate

The bill rate, also known as the billing rate or charge rate, is the amount that staffing services charge their clients for the services provided by their employees, which can also include service fees. The bill rate should be determined by the payroll burden and overhead expenses but also by market conditions, client relationships, and the agency's desired overall profit margin.

Gross Profit vs. Net Profit

After subtracting the payroll burden rate from the bill rate, you will have your gross profit or gross margin. Subtracting overhead costs from this will result in net profit. A temporary staffing company may prefer to operate with a gross margin and mark up a higher bill rate for each client to account for operating expenses and ensure a healthy net profit.

Calculate the Payroll Burden Rate

The total burden rate consists of several factors, such as employee's pay rate, additional taxes, and other obligations, like workers' compensation. For your specific staffing agency, the pay rate will be determined by sector, qualifications, and location. So we will turn our attention to other mandatory costs that constitute your payroll burden.

Federal Insurance Contributions Act (FICA)

Federal Insurance Contributions Act, or FICA, is a federal law that mandates the withholding and payment of Social Security and Medicare taxes. FICA taxes apply to both employees and employers and helps fund these vital social insurance programs. The 2023 FICA rate for employers is 7.65%.

Federal Unemployment Insurance Tax (FUTA)

Federal Unemployment Tax or FUTA is a tax imposed by the federal government on employers to fund unemployment benefits for eligible workers. As of 2023, the FUTA tax rate is 6% on the first $7,000 of wages paid to each employee during the calendar year or up to $420 per employee. However, employers may qualify for a credit of up to 5.4% if they pay state unemployment taxes and meet certain criteria.

State Unemployment Insurance Tax (SUTA)

While SUTA actually refers to State Unemployment Tax Act, it is most commonly known as the State unemployment insurance tax and, depending on the region, sometimes also as reemployment tax or employment security tax.

Each state sets its own SUTA tax rates with certain variables such as:

The lifetime of your business: Some states impose higher SUTA rates for new businesses
Employee retention based on industry: Some states impose higher SUTA rates for industries with high employee turnover
Unemployment claims: If many of your former employees have filed for unemployment, your staffing company can be subject to higher SUTA rates.

That means SUTA rates can vary to a vast extent. For example, SUTA rates in Arizona range from 0.08% to 20.93%, while Texas provides less fluctuation, with SUTA rates between 0.31% and 6.31%.

Health Insurance

The Affordable Care Act (ACA), also known as Obamacare, requires staffing agencies to provide healthcare coverage for employees. The responsibilities are determined by the number of employees.

Determine Eligibility

The staffing agency must assess employee eligibility for healthcare coverage based on factors such as hours worked, employment status, and other criteria specified by the ACA. It's crucial to accurately classify employees as full-time, part-time, or variable-hour employees to determine their eligibility for healthcare benefits.

Evaluate Health insurance Options

Staffing agencies can explore various health insurance options, including group plans, individual plans, or participation in state or federal healthcare exchanges. Careful evaluation of these options will help determine the most suitable and cost-effective healthcare coverage for employees and the agency.

Calculate Healthcare Costs

Once the appropriate health insurance plan is selected, your staffing agency needs to calculate the healthcare costs associated with providing coverage. This includes premiums, deductibles, co-pays, and any other applicable expenses.

Maintain Documentation

To ensure compliance with ACA regulations and demonstrate adherence to healthcare requirements, your staffing firm must maintain detailed documentation of healthcare coverage offered to eligible employees. This includes records of enrollment, contribution calculations, and any other relevant information.

Workers' Compensation Insurance

Worker's compensation insurance provides coverage for employees who suffer work-related injuries or illnesses. It is designed to protect both employees and employers by providing medical benefits and cash payments for injured or ill employees while protecting employers from potential lawsuits related to workplace injuries.

Workers' compensation considerations:

Understand Legal Requirements: Each state has its own requirements for worker's compensation coverage, including specific coverage limits, classifications, and reporting obligations.
Classify Employees Correctly: Different job roles and industry classifications have varying levels of risk, which affects insurance premiums.
Consult with Insurance Providers: Insurance providers can help calculate the premiums based on factors such as the type of work performed, the agency's claims history, and the size of the workforce.
Consider Risk Management Strategies: This may include safety training programs, regular inspections, and implementing safety protocols in client worksites to help reduce worker's compensation costs.

Extra Costs

To attract better talent and increase employee retention, staffing companies may also consider some optional costs. These can be based on a specific pay rate and should also be considered when calculating bill rates.

Some typical costs from optional benefits:

Paid vacation
Accrued vacation
Retirement plans such as 401k
Paid parental leave

So How to Calculate Bill Rate?

So to conclude, how should your staffing agency calculate its bill rate per hour? You should consider the average staffing agency markup, which can range from 40% to 75% for temporary staffing. But to ensure a high net profit margin, your gross margin should account for the following:

Employee's pay rate
Legally mandated labor costs, such as FICA taxes for social security
Operating costs, including salaries, rent, and recruiting fees

Many staffing firms add a small service fee to their bill rate. Whether a service fee is something your staffing agency could consider, should be decided based on your client relationships.

Use Staffing Agency Software

As every company reaps the benefits of digital transformation, it's essential to implement a staff management solution to remain competitive. Scheduling software can be your staffing agency's virtual administrative assistant, providing an automated scheduling process, and location-based time tracking.

Additionally, it can provide your clients access to schedules, employees, timesheets, and offer bill rate transparency to the hiring manager of your client companies. This can make the communication process between your client and your staffing firm. You should also make sure your software solution can automate the hourly pay rate and hourly bill rate for each shift to ensure healthy profits.

Features of a good staffing agency software solution:

Set the hourly rate for temporary employees' wages
Set the bill rate per hour for
Reduce administrative expenses with scheduling automation
Ensure employee accountability with GPS time tracking
Send automatically calculated invoices to clients
Export automatically calculated timesheets to the payroll provider

Pay Rate vs. Bill Rate: A Guide for US Staffing Agencies