Payrolling services explained: how payrolling differs from staffing, PEOs and EORs, and how it is priced

Payrolling is a staffing arrangement in which the client finds the worker and the staffing firm employs them. The American Staffing Association defines it as a staffing firm placing on its payroll employees recruited or hired by the client, and distinguishes it from a PEO because the workers are generally on temporary assignments and make up a small part of the client's workforce. The staffing firm pays wages, handles employment taxes and carries workers' compensation; the client chose the person and directs the work.

This page explains when clients use payrolling, how it compares with temp staffing, PEOs and employer of record services, how it is priced, and what an agency should check before taking it on.

Why clients ask for payrolling

• Headcount limits. A department has budget for a person but no approved permanent headcount.
• A known person. A manager wants a specific contractor, retiree, intern or former employee back for a project, and has already found them.
• Avoiding 1099 risk. The client was going to pay someone as an independent contractor and has been told the role looks like employment. Payrolling puts the worker on a W-2.
• Speed. Onboarding through a staffing firm can be quicker than adding someone to the client's own HR systems for a short engagement.
• A managed program. Large clients running a contingent workforce program may route "client-sourced" workers to a payrolling supplier; see MSP vs. VMS.

Payrolling compared with the alternatives

The ASA defines a PEO as an arrangement in which a business places all or most of its workforce on the payroll of a staffing firm, which takes responsibility for payroll, benefits and other HR functions. PEOs can apply to the IRS's voluntary Certified Professional Employer Organization program. "Employer of record" is a looser commercial term, used for payrolling in the US and, more often, for employing workers in countries where the client has no legal entity. When a client says any of these words, ask what they actually need: one person on a W-2 for six months is payrolling, whatever it is called.

What the staffing firm takes on

In payrolling, the staffing firm becomes the employer for payroll purposes, with the same obligations as for any temp:

• Paying wages on the state's payday schedule, including overtime.
• Withholding and paying federal and state income tax, Social Security and Medicare, and paying federal and state unemployment tax.
• Workers' compensation for the worker's actual duties; see staffing agency insurance requirements.
• Form I-9 and, where required, E-Verify.
• Any benefits or paid leave the firm must provide under federal, state or local law.

What it does not do is choose the worker or direct the work. That split is why payrolling needs clear contracts: the firm carries employer obligations for someone it did not screen, working under someone else's supervision. Both parties can still face claims as joint employers; see joint employer liability for staffing agencies.

How payrolling is priced

Payrolling is normally billed as a markup on the worker's pay rate, like temp staffing, but smaller because the firm has no recruiting cost. The markup still has to cover the statutory burden and the firm's costs. Build it from the bottom up:

1. Employer Social Security and Medicare: 6.2% and 1.45% of wages, with Social Security capped at the annual wage base, $184,500 for 2026 (IRS Topic 751).
2. Federal unemployment tax: 6.0% on the first $7,000 of each worker's wages, reduced to an effective 0.6% with the full state credit (IRS Topic 759).
3. State unemployment tax: your assigned rate on the state's wage base.
4. Workers' compensation: the rate for the worker's class code.
5. Required benefits and paid leave where they apply.
6. Cost of funding payroll until the client pays, plus bad-debt risk.
7. Administration and margin.

An invented example, to show the structure rather than a market rate:

Run your own rates; state unemployment, comp and leave rules change the answer. The full method is in how to calculate staffing markup. Payrolling can also be quoted as a flat fee per hour or per week on top of the burden, which is easier for a client to compare across suppliers.

Contract terms that matter in payrolling

• Client selection and supervision. The agreement should say the client selected the worker and directs the work, and allocate responsibility for workplace conduct and safety accordingly.
• Onboarding before work starts. No hours before the worker has completed the firm's onboarding, I-9 and any background check the client wants the firm to run.
• Timesheet approval. Who approves hours, by when, and that approved time is billable.
• Classification. The worker is a W-2 employee of the firm. If the client wants 1099, the answer is a different conversation; see worker misclassification for staffing agencies.
• Conversion. Clients may want to hire payrolled workers later. Since the client recruited them, a small or waived conversion fee is easier to justify; state it either way, using the structure in temp-to-perm conversion fee.
• Payment terms and credit. Payrolling margins leave little room for late payment. Keep terms short and check credit.

Setting up a payrolled worker, step by step

1. Take the order in writing. Worker name, job title and duties, work location and state, pay rate, expected hours, start and end dates, and the client manager who will approve time.
2. Check the classification and comp code. Duties decide the workers' compensation class and whether the worker is exempt from overtime. Do not accept the client's job title as the answer.
3. Quote the bill rate from the pay rate and the burden for that state, and get it confirmed.
4. Onboard before day one. Offer or assignment letter, tax forms, Form I-9, any background check, policy acknowledgments and state notices. New hire reporting runs as for any employee.
5. Set up time approval. Tell the manager the weekly deadline and what happens to late approvals.
6. Diary the end date. Ask the client two weeks before it whether the engagement ends, extends or converts, so final pay is on time under state rules.

When an agency should say no

• The client wants to use payrolling to exclude long-term workers from its own benefits or policies. Ask counsel before taking it on.
• The worker is already doing hazardous work the firm cannot assess or insure at the quoted rate.
• The client will not agree to onboarding before the start date.
• The margin does not cover the funding cost at the client's payment terms.

Done well, payrolling is low-risk, recurring revenue that can lead to recruiting work with the same client. Done carelessly, it is a small margin on a large employer liability.