One thing that every business needs to take into consideration is its profit margins. It is, without a doubt, one of the most important parts of any new business that wants to be successful. 

This is no different for staffing agencies, who need to walk the fine line between profitability and value provided for their clients. 

Indeed, it can often be difficult to determine just how much you need to charge your clients in order to enjoy a healthy profit margin. Additionally, there are many hidden costs that you need to include in your pay rate for temporary seasonal employees – from medical insurance to operating costs. These things are important, yet many don’t consider them when determining their bill rate.

In this article, we’ll take an extended look at everything a staffing agency needs to know when it comes to optimizing temp agency costs. Read on to find out more information on things such as your bill rate vs. pay rate, temp agency cost, and how to calculate markup rates.

Explanation of Terms

Before moving forward, we need to define a few of the key terms relevant to this topic. 

• Pay rate – This is the amount of money (per hour) that you pay your temporary employees. Generally speaking, the higher the pay rate, the higher quality of the employee.
• Total cost – Also known as payroll burden or burden. While the pay rate typically makes up the largest portion of expenses, there are several other things that you need to consider when calculating your total costs. These additional costs include medical insurance, accrued vacation, workers compensation, and other cities, state, or national taxes.
• Markup – After you agree to an hourly pay rate with your client for your temporary employee, the temp agency will add an additional markup. This amount will vary dramatically depending on the location and quality of the employee. The central purpose of this markup is to allow the temp agency to profit from the transaction. The average temp agency markup ranges from 40 to 60 percent.
• Bill rate – This is the amount of money (per hour) that you bill your clients for supplying them with temporary employees from your agency. This amount can vary depending on several variables and takes into account the pay rate, total expenses, and agency markup. Barring extraordinary circumstances, the majority of your bill rate should consist of the raw pay rate you give your temporary employee.
• Gross profit –  This is the amount (per hour) of profit you will receive per job. To calculate this, simply subtract the total cost from the bill rate. 

Calculate the Total Cost (Pay Rate Plus Additional Costs)

While the raw pay rate is simple enough to understand, there are many additional costs that ramp up the total financial burden a staffing agency needs to pay. Yes, that’s right – the amount you pay your employees is not actually the total amount you will have to pay. Confusing, sure, but we’ll explain this in more detail in the following section.

While we would love to supply a simple bill rate vs pay rate calculator that spits out an easy number for you, it’s not that easy. These costs vary from region to region, as each state or municipality will have different costs that will add to your financial burden.

So what kinds of additional costs will you need to take into account when calculating your total payroll burden? While not an extensive list, here are some of the most common.

The Major Additional Costs That Your Staffing Agency Will Encounter

1. FICA taxes

The Federal Insurance Contributions Act (FICA) funds things such as social security and medicare by taxing payroll. Both the employer and employee have to pay a flat 7.65 percent tax on income, with 6.2 percent of it going to social security and 1.45 percent to medicare. Don’t worry about the employee’s half of this tax – it will come straight out of their paycheck.

This is a nationwide tax, so if you are located within the United States, there’s no getting away from paying it.

2. Unemployment Insurance Tax (State and Federal)

Unemployment insurance has helped millions of Americans survive through this current pandemic and it has long been an important social benefit. There are actually two unemployment taxes you will likely need to pay: both state and federal. 

The federal unemployment insurance tax (FUTA) is 6 percent of the first $7,000 an employee earns. This will be the same no matter where you are located. 

The state unemployment insurance tax (SUTA) will vary depending on which state you are in. Each state has different guidelines, but this rate typically is around 4 percent.

3. Healthcare

The Affordable Care Act – or as it’s more commonly known, Obamacare – dictates that those employers with more than 50 employees must provide health insurance.

The amount you have to cover will also differ depending on several factors, including where you are located, what types of insurance you offer, and what the employee chooses. Another thing to note: some areas require you to cover sick or vacation leave as well. 

4. Worker’s Compensation Insurance

This type of insurance is related to injuries suffered on the job. In every state except for Texas, employers are required to cover this type of insurance. 

This can also vary depending on a few things, such as your state history or work injuries, and type of work. For example, if it is a low-risk office job, the amount will be far lower than one that has to deal with heavy machinery.

5. Additional taxes

While you will likely have to deal with the four previous taxes and insurances no matter where you are located, each state will have its own additional taxes that you will have to pay. Make sure you’re aware of everything you need to know so that you are up to date and on top of all your taxes. If you need help with this, make sure you take advantage of top-of-the-line payroll software.

6. Miscellaneous costs

Every time a new employee begins working at a new place, there are various miscellaneous costs that come with it. This is no different for temp agencies, which need to employ an HR department to attract employees with things such as 401k benefits, maternity or paternity leave, and paid vacation.

Other miscellaneous costs include things that your client requires before allowing the employee to work there, such as background checks and drug tests.

How to Calculate Your Bill Rate

Now that you have your total pay rate covered, we can look at how you should calculate your bill rate. Remember, this is the total amount that you will send to your client for the temporary services of your employees.

So what is a good bill rate to markup rate ratio to set for your staffing agency? Well, as with many things, it depends. 

Across the industry, markups range from 25 percent to 100 percent, depending on the demand of the particular employee. Generally speaking, you’ll likely use a markup that’s somewhere between 40 and 65 percent, though this of course can vary. 

There are a few ways to calculate your bill rate. Let’s take a look at the following pricing models below.

1. Markup Over Raw Pay Rate

In this model, your total costs are not included in your temp agency markup rate. While it is easier to calculate, you will be forced to use a higher markup rate. Plus, if the total cost increases for whatever reason, you will have to choose between a) less money to pay your employee or b) less profitability.  

As an example, if an employee’s pay rate is $20, you could charge them a 40% markup, or $28. Your total cost would be around $23, meaning your profit is around $5.

2. Markup Over the Total Cost

All the costs – from medical insurance to miscellaneous fees – are included in the bill rate. Your client is able to have a lower markup rate and is more likely to vie for your services. If costs go up, you are much more flexible in how you can respond. Using this model allows your clients to see exactly what they are paying for.

For example, if your pay rate is $20 and your total cost for your employee is $23, you can charge a lower markup – say, 25% – to get to $28.75. 

See the difference? By choosing to include all costs in your pay rate markup your clients are able to transparently view the total cost of working with you. It’s a win-win situation for everyone.

What Other Considerations Should You Take When Deciding Your Bill Rate?

It is up to you to determine the demand for your employee and raise or lower your price accordingly. There are a few other external factors that you should consider when determining your markup rate.

• Competition – if you have a lot of competition in your area, then you will likely need to offer competitive pricing for your clients in order to compete with them.
• Industry – This is another important part of your pricing plan. If your primary industry is something such as IT, you will be able to charge more. If it is a less demand industry, you likely won’t be able to charge as much.
• Relationship with the client – Client relationships are important for every type of business. For staffing agencies, it’s important that you cultivate relationships with your clients so that they are more willing to work with you in the future. If you have a positive relationship with a client, they are more likely to pay a higher premium when they know the temporary employee will be a good fit.

All things considered, there is no special method to temp agency markup rates – it’s more an art than a science. 

Simple supply and demand can help here: Depending on position, you can charge more of a premium when clients are plentiful and lower your rates when you find clients scarce.

Lastly, you need to consider the fine line between profitability and providing clients value. If you charge more than your competition, you better make sure that your employees are of the highest quality. Any relationship should be mutually beneficial for both sides. 

How Should You Communicate Your Rates With Clients?

It’s very common for those using temp agencies to complain about the high costs involved. This is mainly due to a lack of transparency: on the surface level, billing a client $38 per hour for a $25 per hour job does seem a bit unreasonable.

The solution to this is to be more transparent with how you calculate your bill rate and your total costs. Be as upfront as possible – many clients simply do not know of the many extra costs in addition to the pay rate. Explain to them what the difference is between bill rate vs. pay rate. Show them that your temp agency markup rates are necessary to keep your own agency running.

Of course, it may not always be feasible to share these figures with your clients. In such a case, you can simply tell them that a small service fee of $5/hour was added to the bill after the total cost was determined.

By being upfront with your clients, you can begin a fruitful relationship that benefits both sides in the long run. When they know that you provide high-quality temporary services, they will likely return to you the next time.

The Bottom Line

It is always difficult to figure out just how much money you need to charge for a service. However, if you make a concerted effort to truly understand things such as bill rate, pay rate, and markups, you will be able to develop a pricing strategy that works for your specific staffing agency. 

For small staffing companies, it’s best to use software to optimize your profitability. Time and attendance software allows you to use all available data to see the bigger picture and, ultimately, help grow your staffing business.

However, whatever solution you decide to use, make sure to take advantage of data to calculate your pay and bill rates. It’s the best way to successfully lead a modern workforce.