For all businesses, success depends on finding the sweet spot between your costs and what you charge. 

If you’re moving into a leadership role at a staffing agency, or thinking about starting your own shop, there are three key terms you need to understand to price your services properly.

Bill Rate: This is the amount per hour that you charge the clients for whom your temporary employees work. 

Pay Rate: This is the amount per hour that you pay your temporary employees. 

Costs of Employment: This is the combined price per hour of a collection of fixed costs associated with employing someone. Some are requirements like workers compensation taxes. Other fixed costs are optional, like accrued vacation. 

Your gross profit per job can be calculated like this: Bill Rate Burden (Pay Rate + Costs of Employment).

You always know your bill rate (you have to tell your client) and your pay rate (you have to tell your employee). Calculating the burden rate is the behind-the-looking-glass magic that makes some staffing firms more successful than others.

    Components of a Burden Rate

    sample burden rate

    There is no universal burden rate calculator, and there never will be. Staffing agencies in neighboring counties will have different burden rates for the exact same job. Burden rate will even differ within companies — the burden rate for the dock worker in the warehouse will be different than the one for the paper salesperson upstairs in the office. 

    These differences exist because the burden rate includes a combination of costs mandated by local laws (all of which have different requirements and rates), and costs you choose to incur on behalf of the employee (like offering a 401K match).

    We can categorize these broadly as regulatory costs and discretionary costs.

    Burden Rate: Regulatory Costs

    We wish we could give you a simple calculator that lets you input a few basic numbers and spits out your burden rate. But because employment regulation is so complex, the calculation would almost certainly be wrong. The location of your company, the size of your company, and the job you are hiring for, may (or may not) change the burden rate. 

    These are the most common costs you have to consider if you are an employer in the United States. 

    FICA Taxes

    The Federal Insurance Contributions Act requires both employees and employers to contribute to Social Security and Medicare. These programs provide cash support to people who are retired, people who are living with disabilities, and children whose working-age parents have died. 

    FICA is probably the easiest of the regulatory costs to track because it applies nationwide, to nearly all workers. The current rate of withholding for employers is 7.65% (6.2% for Social Security, up to $117,000; and 1.45% for Medicare on all pay). 

    Note: Employees must also contribute the same percentage. It comes directly out of their pay and is not typically considered as a cost to the staffing agency — although you’ll want to make sure employees understand the hourly rate you quote for them is not what’s going to appear in their paycheck.

    Unemployment Insurance Taxes – FUTA and SUTA

    State governments, with support from the federal government, provide payments to people who lose their job through no fault of their own. These payments are funded by a tax on employers. Employers must account for both a federal and state tax.

    The federal unemployment insurance tax rate is standard for all employers: 0.6% of the employee’s earnings up to $7,000.

    The state unemployment insurance tax rate varies by state, and also depends on the “experience rating” of the employer — which is the likelihood the business will lay off employees. Typically, the rate is around 4%, and applies up to a certain amount of earnings. The amount will vary by state.

    Workers’ Compensation Insurance

    Workers’ compensation insurance provides for cash payments to employees who suffer an on-the-job injury. In return for being protected by this system, workers aren’t allowed to sue employers for injury compensation (in most cases). Employers are required to carry workers’ compensation in every U.S. state except Texas.

    The rate of workers’ compensation insurance depends on the job in question. The higher the risk of injury, the higher the rate for the insurance. The cost may also depend on the insurer you choose. In some states, the state government runs the program and sets the rates. 

    The cost of workers’ compensation is usually quoted as a per-hour rate ranging from as low as $.10 per hour to as high as $2.50 per hour. 

    Costs Relating to Health Care

    Under the Affordable Care Act, employers who employ more than 50 people are required to offer health insurance. This is another cost that must be included in your burden rate calculation. The amount will depend on the cost of the health insurance you offer (or what your employee chooses).

    States and local municipalities may also have requirements relating to health care or sick leave coverage.

    Other State, County, or Municipality Taxes

    U.S. states have broad authority to levy taxes. In some states, counties and cities levy additional taxes on employment. If you’re building out your burden rate calculation for the first time, contact the local taxing authority in your area. They’ll help you figure out if there are any additional local taxes that apply to your situation. 

    A Sample Burden Rate for Regulatory Costs

    Let’s look at a real-world example of a regulatory cost burden rate. Our example employee is taking over as an executive assistant for the CEO of a Seattle-based commercial real estate firm while the regular executive assistant is on paternity leave. The executive assistant’s pay rate is $30 per hour, and the contract length is full time for 15 weeks, or 600 hours.

    Based on the job duties and the location of the job, these are the regulatory costs a staffing agency would need to absorb in addition to the pay rate.

    • FICA taxes: 7.65% or $2.30/hour
    • Unemployment taxes: 4.1% or $1.23/hour
    • Workers’ Compensation taxes: $0.16/hour
    • Mandated Affordable Care Act costs: 3% or $0.90/hour
    • State of Washington mandated sick leave costs: 2.5% or $0.75/hour
    • City of Seattle and State of Washington Business and Occupation tax: $0.80 

    The total tally for regulatory costs: 20.4% of the employee’s pay rate or $6.13 per hour.

    Burden Rate: Discretionary Costs

    Discretionary costs are extra fees that you decide to absorb as part of hiring an employee. The trick is making sure that you account for all of them.

    Why would you want to incur extra costs when you’re already paying an employee? Because the bells and whistles of discretionary costs can help you attract a higher caliber of candidate and client.

    It should be obvious that potential employees are more likely to affiliate with your agency if you offer perks like 401k contributions, paid vacation, child care reimbursement, and others. What may not be obvious is that client companies love it when you offer those perks as well. Employee perks can be a selling point that differentiates you from competitors. 

    Some costs that fall into the discretionary budget might actually be mandated by your client e.g., background checks or drug testing.

    Going back to our example employee of the temporary executive assistant in Seattle, here’s how discretionary costs might break down.

    • Background check: $40 flat rate or $0.067/hour worked
    • 401k contribution: 4.5% or $1.30/hour
    • Partial child care reimbursement: $100 per week for 15 weeks or $2.50/hour worked
    • Transit pass reimbursement: $265 monthly maximum for 4 months or $1.76/hour worked

    Total tally for discretionary costs: 18.8% of the employee’s pay rate or $5.63 per hour.

    With Burden Rate and Pay Rate, You Can Determine Billing Rate (and Profitability)

    gross profit per job

    We now have a full picture of the true cost of our temporary executive assistant.

    Regulatory costs are 20.4% of the employee’s pay rate or $6.13 per hour. Discretionary costs are an additional 18.8% of the employee’s pay rate or $5.63 per hour.

    Total burden rate: $11.76/hour

    Total pay rate: $30/hour

    Total employee cost: $41.76/hour

    How Do You Calculate Bill Rate?

    Now comes the fun part: Playing with the numbers to see how much money you make per hour. Different agencies call it different things (service fee, gross margin) but the most important thing is understanding your total service fee.

    Few staffing firms share this information with their clients unless it’s an important client that really pushes for figures. A more common way to communicate is “Once we account for the employee’s taxes, benefits, and hourly wages, we collect a small service fee of around $5 per hour.”

    The higher the service fee, the more money you make, but you have to be careful to stay in line with the cost expectations of your clients. It is a fine balance between setting your markup as high as possible while delivering an experience that is above and beyond other agencies, and still attracting a lot of customers. That’s why knowing your burden rate is so critical. Without it, you could negotiate yourself into a fee that doesn’t earn gross profit dollars for your company.

    What Is a Standard Billing Rate to Salary Ratio?

    The burden rate and service fee account for the total markup above the employee’s direct pay rate. A good back-of-the-envelope calculation for this ratio is 1.65:1 or put another way, the billing rate is 65% of the pay rate. In this case, if we add a $5 per hour service fee to the $11.76 per hour burden rate, we get $16.76 per hour as a pay rate, or 55.9% of the $30 per hour rate.

    Pretty close!

    Understand the Math, and Understand the Client

    Of course, for a high-visibility position like executive assistant to the CEO, you might be able to charge a premium. This calculation is more art than science. It depends on what you see as the value you provide to your clients and how effectively you can communicate that value.

    To justify a higher billing rate for your executive assistant, you might share with the hiring manager what your agency does to provide significant value to the recruiting process that is above and beyond what any other agency could provide. An extra level of added care, assessments, screening — all of these increase overall costs. But they also ensure you are delivering the right candidate with the right skills that is going to excel in the role.

    Modern staffing agency software can help bolster your case, and track burden rates, bill rates, and service fees by client, position type, location, and any other custom variables you need.