Compare staffing agency costs with direct employment

Three ways to staff the role

Agency staffing can work well for temporary assignments or workloads that change from week to week. Use the same pay rate, hours, and assignment period for each option. Then compare the total cost of each arrangement.

Agency staffing Pay an agency hourly rate

You pay the staffing agency for hours worked. The bill rate generally covers the worker's pay, employer payroll costs, agency expenses, and profit. Overtime may be billed at a higher rate. The agency generally handles payroll and related administration. It can be a practical choice for short assignments or changing workloads.

Temp-to-hire Start with an agency, then hire directly

The worker begins through an agency and may later join your payroll. Published 2024 and 2025 vendor estimates put conversion fees between 10% and 25% of first-year salary. Some agreements reduce or waive conversion fees after the worker completes a set number of hours. Published examples range from around 520 to more than 1,000 hours. Check the conversion schedule in your agreement to find the point where direct employment costs less.

Direct hire Direct employment

Your business pays wages, employer taxes, workers compensation, and applicable benefits. If you use an outside recruiter, published estimates put placement fees between 15% and 25% of first-year salary, with 20% a commonly cited benchmark. For longer assignments, direct employment may cost less once benefits and hiring expenses are included.

Compare wages, employer costs, agency fees, and conversion expenses over the full assignment period.

What the agency markup covers

Agency markup covers employer payroll taxes, workers compensation, screening, onboarding, administration, operating expenses, and profit.

For example, a 50% markup on a $20 hourly wage produces a $30 hourly bill rate. The additional $10 covers the agency's employer costs, operating expenses, and profit.

Markup varies with the type of work, staffing volume, and assignment risk. High-volume light industrial and clerical assignments may have lower markups. Specialized or higher-risk assignments may carry higher rates. Published 2025 vendor estimates range from 25% to 75%. Check how your agreement calculates markup, overtime, and additional fees. Use those terms when calculating the total agency bill.

Calculate your employer costs

To calculate direct employment costs, begin with wages and add the employer taxes, insurance, and benefits that apply to the position.

Social Security: Employers pay 6.2% of wages up to the annual wage base of $184,500 in 2026.

Medicare: Employers pay 1.45%, with no wage cap. Together, Social Security and Medicare equal the standard 7.65% employer FICA rate on wages below the Social Security limit. The additional 0.9% Medicare tax on employee wages above $200,000 is withheld from employees and has no employer match.

Federal unemployment: FUTA has a standard rate of 6.0% on the first $7,000 of wages. When the full 5.4% credit applies, the effective rate is 0.6%, or approximately $42 per employee annually.

State unemployment: Use the rate assigned to your business.

Workers compensation: Use the applicable rate for the employee’s work classification.

Benefits: Add the employer cost of benefits provided to the employee. The TrueStep HR tools start with editable employer-cost estimates of 18% excluding optional benefits and 30% with a lean benefits package. The 18% estimate assumes mid-range state costs. For comparison, BLS reported that benefits represented 30.0% of total private-industry compensation in June 2026. That is approximately 43% of wages. The BLS benefits figure includes legally required benefits, including employer payroll taxes and workers compensation, so account for those expenses only once. Replace the planning estimates with your actual employer rates and benefit costs.

See how the four options compare

Compare four arrangements: keeping the current staffing agency, moving to a lower-markup payrolling service, hiring directly with employer costs but without optional benefits, and hiring directly with benefits.

Take Calder Supply Company, a fictional distributor with 40 contingent workers. Each worker earns $20 per hour and works 40 regular hours plus five overtime hours each week. The remaining assignment is 26 weeks.

At time and a half for overtime, the total wage base is $988,000. Use the same wage base and assignment period for all four comparisons.

Calculate each option using its agency billing terms, payrolling markup, or direct employer costs and applicable benefits.

Include conversion fees, recruiting, training, transition expenses, and any applicable separation costs. Compare the total for each arrangement, then calculate when savings from direct employment would cover conversion expenses.

Keeping the agency arrangement may cost less for shorter assignments or when conversion fees are high. Direct employment may cost less over longer assignments when employer costs are lower. Comparing both over the same period shows how assignment length and conversion fees affect the total.

Check classification and benefit eligibility

Worker classification and benefit eligibility belong in the staffing cost comparison. The applicable classification standards and benefit plan terms affect both the cost and the employer's obligations. In Vizcaino v. Microsoft, litigation involving long-serving temporary and contract workers ultimately settled for approximately $97 million. Some employers use assignment limits of 18 to 24 months and breaks between assignments as administrative practices. Classification and benefit eligibility still depend on the worker's circumstances, applicable standards, and benefit plan terms.

The Department of Labor's six-factor economic reality test took effect on 11 March 2024. Field Assistance Bulletin 2025-1 later addressed enforcement while the Department reconsidered the rule. A proposal published 27 February 2026 would rescind it. The comment period closed 28 April 2026, and the proposal had not been finalized as of 23 July 2026. The IRS applies its own common-law test. States may have additional requirements, including California's ABC test.

California Labor Code section 226.8 lists civil penalties of $5,000 to $15,000 per willful independent contractor misclassification violation. For a pattern or practice, the penalties increase to $10,000 to $25,000. If independent contracting is one of the options, have employment counsel review the proposed arrangement before making the change.

Compare costs using your staffing numbers

The free Staffing Agency vs Payroll Cost Calculator puts agency billing, payrolling, and direct employment with and without benefits side by side. Enter your worker count, pay rates, agency markup, and employer costs to see how the four options compare. The free Temp-to-Hire Breakeven Calculator compares direct hire, temp-to-hire, and direct placement for one position. It includes conversion fees and the agreement's fee-reduction or waiver schedule. Both calculators let you adjust the assumptions for your own workforce.

For larger staffing programs, the following tools help manage cost comparisons, conversion planning, worker classification, and agency relationships across multiple positions.

Contingent Labor Cost and Conversion Workbook: Compare individual positions and entire staffing programs, including employer costs and alternative scenarios.

Temp-to-Hire and Direct-Placement Decision Workbook: Evaluate multiple requisitions, placement fees, and declining conversion fees.

Contingent Workforce Headcount and Spend Tracker: Monitor contingent headcount, monthly spending, assignment tenure, and potential conversions, with tenure-limit flags and a conversion watchlist.

Independent Contractor Classification and Risk Kit: Review individual worker arrangements against three classification frameworks.

Staffing Agency Management Kit: Examine agency agreement terms and compare staffing vendors against markup benchmarks.

Contingent Workforce Cost and Compliance Kit: Manage staffing costs, classification reviews, agency agreements, and workforce tracking together.

Workforce Cost Control Bundle: Pair the conversion workbook with additional labor-cost planning tools.

For a closer look at employer expenses, see the fully loaded cost of an employee.