Staffing agency accounting centers on the spread between the bill rate charged to the client and the worker's pay plus employer burden. When revenue presentation and burden accruals are handled correctly, gross margin by client becomes a reliable management tool.
This guide covers staffing agency accounting as it stands in October 2026 for temporary staffing, contract staffing and direct-hire recruiting firms. It explains gross versus net revenue under ASC 606, how contract and placement fees differ, payroll funding, workers' compensation and SUTA, the 2026 FICA wage base, and the ACA employer mandate for temporary staff, with a worked margin example.
A staffing agency carries a payroll that is large relative to its revenue. A firm with 200 temporary employees on assignment runs 200 paychecks every week, each tied to a bill rate, a pay rate, a state, and a workers' compensation class. Each paycheck has a matching invoice line, and the two rarely land in the same accounting period.
The result is a set of balances most service businesses never deal with: unbilled receivables for hours already worked and awaiting an invoice, accrued payroll for hours awaiting payment, workers' comp premiums estimated during the year and trued up once actual payroll is known, and state unemployment liabilities spread across every state where temps work.
The first question in staffing agency accounting is whether the agency reports the full invoice as revenue (gross) or only its markup (net). Under ASC 606, the answer depends on whether the agency acts as a principal or an agent for the service the client receives. The principal versus agent guidance sits in ASC 606-10-55-36 through 55-40, as amended by ASU 2016-08. The test is control: an entity is a principal if it controls the specified service before it is transferred to the customer. Indicators of control include being primarily responsible for fulfilling the promise, bearing inventory risk, and having discretion in setting the price. Our ASC 606 implementation guide explains how performance obligations are identified first.
For a traditional temporary staffing arrangement, most agencies conclude they are the principal. The agency recruits and selects the worker, employs them on its own payroll, carries the employment risk if the client does not pay, and negotiates the bill rate. Those facts point to gross reporting: the full bill amount is revenue and the temp's wages and burden are cost of services.
Some arrangements look different. In a payrolling arrangement, the client recruits the worker, sets the pay and bill rate, and uses the agency only to run payroll. In those cases, the agency may conclude it is an agent for some or all of the service and should report only its fee. The conclusion depends on contract terms, so each major contract type deserves a short, documented memo that the CPA or auditor can review.
Gross versus net does not change gross profit dollars. It changes revenue, cost of services, and every ratio built on them, including the gross margin percentage that lenders and buyers compare across agencies.
Contract and temporary staffing revenue is earned as hours are worked. The client receives and consumes the service each hour, so revenue is recognized over time, usually as hours are approved on timesheets. At month-end, hours worked but not yet invoiced are booked as unbilled receivables at the bill rate, with the matching wages and burden accrued as cost of services.
Direct-hire or permanent placement fees work differently. The agency's promise is to find a candidate who accepts the role, so the fee is usually recognized at a point in time, typically the candidate's start date. Many contracts include a guarantee period during which the agency refunds part of the fee or replaces the candidate if the hire leaves early. Under ASC 606 that guarantee is variable consideration, so the agency estimates expected refunds from its own history and records a refund liability.
Contract-to-hire arrangements combine both. Hourly billings during the contract phase are recognized over time, and any conversion fee is recognized when the conversion happens, net of expected refunds.
| Revenue stream | When recognized | Typical presentation | Main balance sheet item |
|---|---|---|---|
| Temporary or contract staffing | Over time, as hours are worked | Usually gross (principal) | Unbilled receivables, accrued payroll |
| Payrolling services | Over time, as payroll is processed | Often net (agent) | Client deposits, pass-through payables |
| Direct-hire placement fee | Point in time, usually start date | Gross fee | Refund liability for guarantee period |
| Contract-to-hire conversion fee | When conversion occurs | Gross fee | Refund liability, if guaranteed |
Burden is the employer cost on top of gross wages.
FICA. Employers pay Social Security tax at 6.2% and Medicare tax at 1.45% on wages. For 2026, the Social Security portion applies only to the first $184,500 of each employee's wages, according to IRS Topic 751. Very few hourly temps reach that cap, so the full 7.65% usually applies to every temp paycheck, while highly paid IT or professional contractors may cross it late in the year. Deposits and quarterly reporting run through Form 941, and unpaid withheld taxes can trigger the Trust Fund Recovery Penalty against owners personally.
FUTA. The federal unemployment tax rate is 6.0% on the first $7,000 of each employee's wages, with a credit of up to 5.4% for state unemployment taxes paid on time, per IRS Topic 759. That leaves a typical net rate of 0.6%, or $42 per employee per year. High-turnover agencies hit the $7,000 base on many short assignments, which raises FUTA per hour worked. Employers in FUTA credit reduction states pay more, and the annual return is Form 940.
SUTA. The US Department of Labor notes that "State law determines individual state unemployment insurance tax rates." Each state also sets its own taxable wage base. An agency with temps in many states needs a SUTA rate and wage base table per state, updated each January when new rate notices arrive. The mechanics of withholding and SUI registration across states are covered in our guide to multi-state payroll rules for 2026.
Workers' compensation. Workers' comp premiums generally depend on payroll and on the job classification of each worker, and rates vary by state and carrier. Policies are commonly priced on estimated payroll and adjusted after the policy period once actual payroll is known. The accounting task is a monthly accrual: actual payroll by classification multiplied by the current rate, compared with premiums billed, with the difference booked each month. Coding each placement to the class that matches the actual duties matters as much as the rate. A light industrial worker coded as clerical understates premium during the year and can lead to an additional premium bill at the year-end adjustment.
Take one full-time temp on a year-long assignment. The rates for SUTA and workers' comp below are illustrative; use your own rate notices.
| Line | Calculation | Amount |
|---|---|---|
| Revenue (gross) | $40.00 x 2,080 | $83,200 |
| Wages | $25.00 x 2,080 | $52,000 |
| FICA | 7.65% x $52,000 | $3,978 |
| FUTA | 0.6% x $7,000 | $42 |
| SUTA | 3.0% x $12,000 | $360 |
| Workers' comp | $52,000 / 100 x $2.00 | $1,040 |
| Total burden | Sum of the four lines | $5,420 (10.42% of wages) |
| Gross profit | $83,200 less $52,000 less $5,420 | $25,780 |
| Gross margin (gross presentation) | $25,780 / $83,200 | 30.99% |
| Gross profit per hour | $25,780 / 2,080 | $12.39 |
If the same arrangement were judged an agent relationship, revenue would be reported as $25,780 and the margin percentage on the income statement would look very different, even though the profit is identical.
Under the Fair Labor Standards Act, non-exempt employees must be paid for hours over 40 in a workweek "at a rate not less than time and one-half their regular rates of pay," per the Department of Labor. The bill rate for those hours depends entirely on the client contract.
Using the same temp, a 50-hour week with 10 overtime hours, and only the burden that scales with wages (FICA at 7.65% and workers' comp at 2%):
| Overtime billing term | Weekly revenue | Weekly wages | Variable burden | Weekly gross profit | Margin on the 10 OT hours |
|---|---|---|---|---|---|
| OT billed at 1.5x ($60.00) | $2,200 | $1,375 | $132.69 | $692.31 | 31.47% |
| OT billed at straight time ($40.00) | $2,000 | $1,375 | $132.69 | $492.31 | -2.80% |
At straight-time billing, each overtime hour costs $37.50 in wages plus burden of about $3.62 and brings in $40.00, so the agency loses money on those hours. Monthly margin reports should split straight-time and overtime hours by client so these contracts surface quickly.
The One Big Beautiful Bill Act added a federal income tax deduction for qualified overtime pay. According to the IRS, the maximum annual deduction is $12,500, or $25,000 for joint filers. The agency's pay and bill amounts stay the same. The added work is in payroll reporting, covered in our note on the 2026 Form W-2 redesign.
Staffing agencies pay temps weekly and collect from clients on 30 to 60 day terms. Growth widens that gap: every new placement adds weeks of wages and taxes paid before the first invoice is collected. Two common answers are a bank line of credit secured by receivables and payroll funding, where a funder advances cash against invoices (factoring) or against approved timesheets.
The accounting treatment depends on the agreement. In a non-recourse sale of receivables that meets the derecognition criteria, the receivable leaves the books and the discount is a cost. In a recourse arrangement or a secured loan, the receivable stays on the balance sheet and the advance is a liability, with fees recorded as interest or financing cost. Reserves held back by the funder are a separate receivable. Reconcile each funder statement monthly to the aging so fees are not missed.
A 13-week cash forecast built from the payroll calendar and client payment patterns shows when the funding line will be stretched. Our guide on improving cash flow in a growing business covers the forecasting steps in more detail.
Temps on an agency's payroll are usually the agency's common-law employees, which means they count toward the agency's headcount under the ACA employer shared responsibility rules. The IRS defines an applicable large employer as one with "generally 50 full-time employees including full-time equivalent employees," and treats an employee as full time for a month if they average "at least 30 hours of service per week or has 130 hours of service in the month."
An applicable large employer can owe a payment if it fails to offer coverage to at least 95% of full-time employees, or if the coverage it offers is unaffordable or lacks minimum value and a full-time employee receives a premium tax credit. For plan years beginning in 2026, the affordability threshold is 9.96% of household income under Rev. Proc. 2025-25. Because employers rarely know household income, most use one of the IRS safe harbors based on Form W-2 wages, rate of pay, or the federal poverty line.
Staffing agencies face two specific issues. Temp hours vary week to week, so many agencies use the IRS look-back measurement method, which has special rules for variable-hour and seasonal employees, to decide who counts as full time. The IRS also recognizes that in certain cases a staffing firm's offer of coverage can count as an offer made on behalf of the client employer, which matters when a client is the common-law employer, as can happen in some payrolling setups. Agencies weighing a PEO for benefits can compare PEO vs in-house payroll.
Worker classification also matters. Treating recruiters or placed workers as 1099 contractors when they meet the employee tests shifts payroll tax, ACA and workers' comp exposure back onto the agency, and California's ABC test under AB5 is stricter than the federal common-law standard.
A workable close sequence for a staffing agency looks like this:
Do staffing agencies record revenue gross or net? Most temporary staffing agencies report revenue gross because they recruit, employ and pay the worker, carry credit risk and set the bill rate, which point to principal status under ASC 606. Payrolling or pass-through arrangements where the client picks the worker and sets the rates may be agent relationships reported net. The conclusion should be documented by contract type.
When is a direct-hire placement fee recognized? Usually when the candidate starts, because that is when the agency has fulfilled its promise. If the contract includes a guarantee or refund period, the agency estimates expected refunds and records a refund liability instead of recognizing the full fee as earned.
What is the 2026 Social Security wage base for temp payroll? For 2026, the employer Social Security tax of 6.2% applies to the first $184,500 of wages per employee. Medicare tax of 1.45% for the employer has no wage cap.
What is the ACA affordability percentage for 2026? For plan years beginning in 2026, coverage is affordable if the employee's required contribution for self-only coverage does not exceed 9.96% of household income, under Rev. Proc. 2025-25. Employers commonly test this with the W-2 wages, rate of pay, or federal poverty line safe harbor.
How should a staffing agency account for workers' comp between audits? Accrue premium monthly from actual payroll by classification multiplied by the current rate, compare it with premiums billed, and book the difference. This keeps the year-end adjustment small.
Madras Accountancy supports US CPA firms and their business clients with outsourced bookkeeping, payroll reconciliation, month-end close, accrual accounting and management reporting, including for staffing and recruiting agencies. To discuss your workload, contact our team.
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