How Do Temp Agencies Make Money? Business Model Explained

Temporary staffing agencies—also known as temp agencies—play a crucial role in connecting businesses with short-term workers. Whether it’s seasonal labor, administrative help, or skilled trade professionals, companies often turn to temp firms for fast, flexible staffing solutions.

But a common question is: how do temp agencies make money?

The answer lies in a markup-based business model that benefits both the agency and the client company. In this article, we’ll break down:

How temp agencies generate revenue
What markup rates are and how they work
The difference between temp and direct hire models
Real-world examples
Common myths about staffing agency fees

What Is a Temp Agency?

A temp agency is a third-party company that recruits, hires, and places workers into temporary or contract jobs at other companies. These positions may last from a few days to several months and may lead to full-time employment.

Temp agencies handle:

Job posting and recruitment
Screening and background checks
Payroll and taxes for the temp worker
Compliance and HR paperwork

So, How Do Temp Agencies Make Money?

The primary way temp agencies earn income is through a markup on the worker’s hourly wage.

Here’s how it works:

The temp agency hires a worker and agrees to pay them $18/hour.
The agency then “sells” that labor to the client company at $25/hour.
The $7/hour difference is the markup, which covers agency profit, taxes, and administrative costs.

This structure allows businesses to access labor on demand without managing payroll or compliance risks—while giving the agency a profit margin on each hour worked.

Breakdown: Where the Money Goes

Category	Percentage of Markup
Temp worker’s wage	~65–75% of the bill rate
Payroll taxes & insurance	~10–15%
Administrative overhead	~5–10%
Agency profit margin	~10–20%

Example:

Bill rate to client: $30/hour
Temp worker’s pay: $20/hour
Agency gross profit: $10/hour
Net profit after expenses: ~$3–$5/hour

What Is a Typical Temp Agency Markup Rate?

Markup rates usually range from 25% to 75%, depending on:

Industry (e.g., IT staffing vs. warehouse work)
Skill level and wage of the temp worker
Volume of hires
Contract length and complexity
Region or cost of living

Higher-skilled positions tend to have lower percentage markups but higher dollar values.

Other Ways Temp Agencies Make Money

Besides hourly markups, some staffing firms also earn revenue through:

Temp-to-Perm Conversion Fees

If a client decides to hire the temp worker full-time, they may pay a one-time conversion fee. This can be:

Flat fee (e.g., $2,500)
Or a percentage of the candidate’s annual salary (usually 10–25%)

Direct Hire or Recruitment Fees

Some agencies offer permanent placement services, charging a one-time fee (often 15–30% of the candidate’s first-year salary).

Volume-Based Contracts

Larger businesses may negotiate contracts with temp agencies that include bulk pricing, giving the agency a consistent revenue stream.

Government Incentives or Tax Credits

In some regions, agencies that place veterans, formerly incarcerated individuals, or people with disabilities may qualify for workforce development incentives.

Why Businesses Are Willing to Pay More for Temps

Although the bill rate is higher than the worker’s wage, companies benefit from:

Zero responsibility for payroll taxes or workers’ compensation
No recruitment or screening costs
Immediate access to vetted talent
Flexibility to scale up or down with demand
Reduced liability and HR headaches

It’s a value exchange—companies pay more per hour for less risk and greater convenience.

Real-World Example of Temp Agency Revenue

Let’s say a staffing agency places 20 warehouse workers for a 3-month seasonal contract.

Hourly wage to worker: $18/hour
Client bill rate: $26/hour
Hours per week per worker: 40
Weeks worked: 12

Total profit = (Markup $8/hour x 40 hours x 12 weeks x 20 workers) = $76,800

This shows how temp agencies can earn solid revenue through large placements, even with moderate margins.

Common Misconceptions About Temp Agency Pricing

Myth	Reality
“They take money from the worker’s pay.”	Workers get their full agreed wage; the client pays extra.
“Markup is all profit.”	It covers payroll taxes, insurance, and admin costs too.
“Temp jobs don’t pay well.”	Many temp roles offer competitive pay and career growth.

How to Evaluate a Temp Agency’s Pricing

If you’re a business considering temp staffing, ask:

What is your markup rate or bill rate per role?
What’s included (payroll, taxes, insurance)?
Do you offer volume discounts?
What’s your temp-to-perm conversion fee?
Can you provide proof of compliance and insurance?

Conclusion

To answer the question, “how do temp agencies make money?”:
They primarily generate income by charging a markup on the hourly wage of temporary workers. This covers wages, taxes, benefits, and overhead—while delivering value to businesses through flexible staffing and risk reduction.

For companies, the extra cost brings speed, convenience, and HR relief. For job seekers, temp agencies offer access to jobs, skill development, and pathways to permanent employment.