What’s Included in a Bill Rate for Temporary Staffing and Payrolling Services
Posted on June 12th, 2016 Read time: 5 minutes
If you’ve used temporary staffing or payrolling services before, you may have a general understanding of all the costs that are included in a bill rate. However if you’re just now considering these services you might be a bit surprised when the staffing firm quotes the rate to you. The purpose of this article is to give you a better understanding of what is included in that bill rate and help you make a more informed decision when choosing a staffing or payrolling firm.
Pay Rate
The majority of the hourly bill rate you pay goes to the employee in the form of wages. The higher skilled positions will cost more than a lower skilled worker and this will impact your bill rate in two ways. The high wage is the first and most obvious. However in addition, the staffing firm will likely have more costs associated with recruiting a highly skilled individual and can demand a higher fee for their recruiting services.
Employment Taxes and Benefits
In addition to the hourly wage, an employer is obligated to pay taxes and benefits. Following is a list of the most common costs that will be included in the hourly bill rate:
Federal Insurance Contributions Act (FICA) – FICA is a US federal payroll tax imposed on both employees and employers to fund Social Security and Medicare. The employers’ 2016 tax rate for social security, is 6.2% of compensation taxed up to $118,500 of wages. This limit changes annually. The employer’s tax for Medicare funding is 1.45% of wages with no limit.
State Unemployment Tax Act (SUTA) or State Unemployment Insurance (SUI) – SUTA/SUI is an employer tax that funds the state unemployment programs and provides unemployment benefits to former employees. The tax rate varies by state. Employers that have higher employee claims pay a higher tax and employers that have fewer claims experience pay less. Each state also has its own tax rate range and maximum contribution levels.
Federal Unemployment Tax Act (FUTA) – FUTA is a US federal tax paid by most employers to help fund state workforce agencies. The FUTA tax rate in 2016 applies to the first $7,000 an employer pays in wages and is 6.0%. Employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. The 5.4% credit will be reduced for states that borrow funds from the federal government to pay unemployment benefits.
Workers Compensation Insurance – Workers compensation is a mandatory insurance for companies with employees that covers the cost of medical treatment in the event of a workplace injury or illness, covers employees lost wages in the event they are not able to return to work, and covers the cost of litigation should an injured worker sue the company for negligence. Workers compensation insurance varies based on the industry of the company, the position of the worker, and the state in which the employee is working. Another factor which should not be discounted is the company’s safety record and claims experience. Companies with a culture of safety and low level of injuries will have lower premiums than companies that ignore safety best practices and a high level of injuries. Workers compensation premiums are charged by $100 of payroll so for example, an employee working for a law firm may cost the law firm $0.62 per $100 of payroll in workers compensation premium, whereas an inventory specialist in a warehouse for a large retail distributer may be much higher at $3.32 per $100 of payroll.
Mandatory Local, State and Federal Benefits – The cost of benefits vary greatly by organization and by location. As you can imagine, some industries that compete for highly technical and skilled talent offer creative benefits to their employees as a way to differentiate themselves from their competitors. Everything from ping pong tables, popcorn machines and Friday happy hours to onsite day care, dry cleaning services and sleeping pods are not the exception but the norm in companies like Amazon and Google. For purposes of this article I am going to just mention the basic benefits that are now mandatory in many cities and states and through federal policy.
Health Care – Contrary to most people’s understanding of the Affordable Care Act, employers are not required to provide comprehensive health insurance to their full time employees, however if they do not, they face tax penalties annually of $2,160 (assessed monthly and adjusted annually for inflation) per employee. In either scenario, companies that have more than 50 full time employees have the cost of health insurance or tax penalties.
Paid Sick Leave – As of the date I’m writing this article, there are 22 jurisdictions currently requiring some form of paid sick leave benefit for employees and there are 7 more that we are monitoring that have not taken effect yet including one at the federal level requiring paid sick leave benefits for government contractors to the federal government.
Miscellaneous – Other mandatory benefits that we are seeing include employer paid jury duty, family leave, and commuter benefits.
Let’s use an example of a staff accountant earning $35 per hour. The per hour payroll costs that the temporary staffing company will need to pay are shown in the table below. Keep in mind that there are many variables that could impact these rates such as the work state, the workers compensation experience rate of the staffing firm and the unemployment claims experience of the staffing firm. Table A is purely an example of what the total payroll taxes might look like.
Table A
TAX DOLLARS write valueFICA - Social Security $ 2.17 FICA - Medicare $ 0.51 FUTA $ 2.63 SUTA $ 0.84 Workers Compensation Insurance $ 0.15 Paid Sick Leave Accrual $ 0.05 Health Care $ 0.40 Total Payroll Taxes $ 6.75
To calculate the total payroll costs, or burden, add the hourly wage and the total payroll taxes. See Table B.
Table B
COST OF PAYROLL DOLLARS Pay rate $ 35.00 Payroll Taxes $ 6.75 Total Payroll Burden $ 41.75
Bill Rates
Bill rates and markups will vary based on a lot of factors including the size and location of the staffing firm, the types of positions for which they recruit, and their market. Ranges vary from 35% markup to 100% markup on the pay rate which typically includes the payroll burden as explained above. For example, let’s use 65% markup which is not unreasonable for a staffing firm placing administrative and entry level professional positions.
Table C
BILL RATE CALCULATION RATE Pay rate $ 35.00 Staffing firm markup 65% Bill Rate to Client $ 57.75
Staffing Firm Profit
In order to understand the profits earned by staffing firms, I’ll explain gross profit and net profit.
Gross profit per hour is the profit earned per hour by the staffing firm for each employee before taking into consideration the operating costs of the business. To calculate this take the Bill Rate to the Client and subtract the Total Payroll Burden.
Table D
GROSS PROFIT DOLLARS Bill rate $ 57.75 Payroll burden $ (41.75) Gross Profit $ 16.00
Net profit is the overal profit of the staffing firm after it pays for the staff and advertising to recruit and assign the employees, office space, general liability insurances, marketing, and other expenses associated with the operation of the business.
Table E
NET PROFIT DOLLARS Gross Profit $ 16.00 Operating costs $ (8.00) Net Profit $ 8.00
Because of the significant cost associated with recruiting employees, many companies have decided to insource their recruiting efforts for temporary employees and utilize the services of a payrolling firm. A payrolling company is a temporary staffing firm that does not recruit and place the employees on the assignment, resulting in a significant savings for the client often times up to 30-40 percent.
In Summary
By understanding the costs and the variables that staffing firms must factor into their pricing, it will hopefully give you the information you need to ask the right questions to determine if the price is competitive and whether temporary staffing or payrolling is the best option for your organization.
By: Tania Fiero, Vice President of Human Resources
Tania Fiero, PHR is Vice President of Human Resources at Innovative Employee Solutions, a nationwide employer of record founded in 1974 in San Diego that specializes in payrolling and contractor management services for today’s contingent workforce.
Related Articles
Posted on June 12th, 2016 Read time: 5 minutes
If you’ve used temporary staffing or payrolling services before, you may have a general understanding of all the costs that are included in a bill rate. However if you’re just now considering these services you might be a bit surprised when the staffing firm quotes the rate to you. The purpose of this article is to give you a better understanding of what is included in that bill rate and help you make a more informed decision when choosing a staffing or payrolling firm.
Pay Rate
The majority of the hourly bill rate you pay goes to the employee in the form of wages. The higher skilled positions will cost more than a lower skilled worker and this will impact your bill rate in two ways. The high wage is the first and most obvious. However in addition, the staffing firm will likely have more costs associated with recruiting a highly skilled individual and can demand a higher fee for their recruiting services.
Employment Taxes and Benefits
In addition to the hourly wage, an employer is obligated to pay taxes and benefits. Following is a list of the most common costs that will be included in the hourly bill rate:
Federal Insurance Contributions Act (FICA) – FICA is a US federal payroll tax imposed on both employees and employers to fund Social Security and Medicare. The employers’ 2016 tax rate for social security, is 6.2% of compensation taxed up to $118,500 of wages. This limit changes annually. The employer’s tax for Medicare funding is 1.45% of wages with no limit.
State Unemployment Tax Act (SUTA) or State Unemployment Insurance (SUI) – SUTA/SUI is an employer tax that funds the state unemployment programs and provides unemployment benefits to former employees. The tax rate varies by state. Employers that have higher employee claims pay a higher tax and employers that have fewer claims experience pay less. Each state also has its own tax rate range and maximum contribution levels.
Federal Unemployment Tax Act (FUTA) – FUTA is a US federal tax paid by most employers to help fund state workforce agencies. The FUTA tax rate in 2016 applies to the first $7,000 an employer pays in wages and is 6.0%. Employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. The 5.4% credit will be reduced for states that borrow funds from the federal government to pay unemployment benefits.
Workers Compensation Insurance – Workers compensation is a mandatory insurance for companies with employees that covers the cost of medical treatment in the event of a workplace injury or illness, covers employees lost wages in the event they are not able to return to work, and covers the cost of litigation should an injured worker sue the company for negligence. Workers compensation insurance varies based on the industry of the company, the position of the worker, and the state in which the employee is working. Another factor which should not be discounted is the company’s safety record and claims experience. Companies with a culture of safety and low level of injuries will have lower premiums than companies that ignore safety best practices and a high level of injuries. Workers compensation premiums are charged by $100 of payroll so for example, an employee working for a law firm may cost the law firm $0.62 per $100 of payroll in workers compensation premium, whereas an inventory specialist in a warehouse for a large retail distributer may be much higher at $3.32 per $100 of payroll.
Mandatory Local, State and Federal Benefits – The cost of benefits vary greatly by organization and by location. As you can imagine, some industries that compete for highly technical and skilled talent offer creative benefits to their employees as a way to differentiate themselves from their competitors. Everything from ping pong tables, popcorn machines and Friday happy hours to onsite day care, dry cleaning services and sleeping pods are not the exception but the norm in companies like Amazon and Google. For purposes of this article I am going to just mention the basic benefits that are now mandatory in many cities and states and through federal policy.
Health Care – Contrary to most people’s understanding of the Affordable Care Act, employers are not required to provide comprehensive health insurance to their full time employees, however if they do not, they face tax penalties annually of $2,160 (assessed monthly and adjusted annually for inflation) per employee. In either scenario, companies that have more than 50 full time employees have the cost of health insurance or tax penalties.
Paid Sick Leave – As of the date I’m writing this article, there are 22 jurisdictions currently requiring some form of paid sick leave benefit for employees and there are 7 more that we are monitoring that have not taken effect yet including one at the federal level requiring paid sick leave benefits for government contractors to the federal government.
Miscellaneous – Other mandatory benefits that we are seeing include employer paid jury duty, family leave, and commuter benefits.
Let’s use an example of a staff accountant earning $35 per hour. The per hour payroll costs that the temporary staffing company will need to pay are shown in the table below. Keep in mind that there are many variables that could impact these rates such as the work state, the workers compensation experience rate of the staffing firm and the unemployment claims experience of the staffing firm. Table A is purely an example of what the total payroll taxes might look like.
Table A
| TAX | DOLLARS |
|---|---|
| write valueFICA - Social Security | $ 2.17 |
| FICA - Medicare | $ 0.51 |
| FUTA | $ 2.63 |
| SUTA | $ 0.84 |
| Workers Compensation Insurance | $ 0.15 |
| Paid Sick Leave Accrual | $ 0.05 |
| Health Care | $ 0.40 |
| Total Payroll Taxes | $ 6.75 |
To calculate the total payroll costs, or burden, add the hourly wage and the total payroll taxes. See Table B.
Table B
| COST OF PAYROLL | DOLLARS |
|---|---|
| Pay rate | $ 35.00 |
| Payroll Taxes | $ 6.75 |
| Total Payroll Burden | $ 41.75 |
Bill Rates
Bill rates and markups will vary based on a lot of factors including the size and location of the staffing firm, the types of positions for which they recruit, and their market. Ranges vary from 35% markup to 100% markup on the pay rate which typically includes the payroll burden as explained above. For example, let’s use 65% markup which is not unreasonable for a staffing firm placing administrative and entry level professional positions.
Table C
| BILL RATE CALCULATION | RATE |
|---|---|
| Pay rate | $ 35.00 |
| Staffing firm markup | 65% |
| Bill Rate to Client | $ 57.75 |
Staffing Firm Profit
In order to understand the profits earned by staffing firms, I’ll explain gross profit and net profit.
Gross profit per hour is the profit earned per hour by the staffing firm for each employee before taking into consideration the operating costs of the business. To calculate this take the Bill Rate to the Client and subtract the Total Payroll Burden.
Table D
| GROSS PROFIT | DOLLARS |
|---|---|
| Bill rate | $ 57.75 |
| Payroll burden | $ (41.75) |
| Gross Profit | $ 16.00 |
Net profit is the overal profit of the staffing firm after it pays for the staff and advertising to recruit and assign the employees, office space, general liability insurances, marketing, and other expenses associated with the operation of the business.
Table E
| NET PROFIT | DOLLARS |
|---|---|
| Gross Profit | $ 16.00 |
| Operating costs | $ (8.00) |
| Net Profit | $ 8.00 |
Because of the significant cost associated with recruiting employees, many companies have decided to insource their recruiting efforts for temporary employees and utilize the services of a payrolling firm. A payrolling company is a temporary staffing firm that does not recruit and place the employees on the assignment, resulting in a significant savings for the client often times up to 30-40 percent.
In Summary
By understanding the costs and the variables that staffing firms must factor into their pricing, it will hopefully give you the information you need to ask the right questions to determine if the price is competitive and whether temporary staffing or payrolling is the best option for your organization.
By: Tania Fiero, Vice President of Human Resources
Tania Fiero, PHR is Vice President of Human Resources at Innovative Employee Solutions, a nationwide employer of record founded in 1974 in San Diego that specializes in payrolling and contractor management services for today’s contingent workforce.
