What is a temp agency, and how does it work?

By the HRPricing editorial teamReviewed October 18, 2026How we research and score

A temp agency is a staffing company that recruits workers, puts them on its own payroll and places them at client businesses for a set period, while the client directs the day-to-day work. As the W-2 employer the agency pays the payroll taxes, and for a $20-an-hour worker in Texas those alone come to 8.34% of wages in 2026, before workers' comp and the agency's margin.

A temp agency (temporary staffing agency) employs workers and assigns them to client businesses for short or fixed periods, billing the client an hourly rate.

How a temp agency works

The client orders a worker for a role, a rate and a period.
The agency recruits, screens and hires the worker as its own employee.
The worker reports to the client, and the client approves hours.
The agency pays the worker, withholds taxes, issues the W-2 and bills the client a marked-up hourly rate.
If the client wants to hire the temp, the contract may set a conversion fee or a minimum number of hours first. Read that clause before you sign.

Example: what is inside a temp bill rate

Employer taxes on a $20 an hour temp working 2,080 hours in Texas, 2026
Cost	Amount
Wages	$41,600
Social Security and Medicare at 7.65%	$3,182.40
FUTA at 0.6% of the first $7,000	$42
Texas SUTA at the 2.7% new-employer rate on $9,000	$243
Total payroll taxes	$3,467.40 (8.34% of wages)

Sources: IRS Publication 15 (2026), IRS Form 940 instructions, Texas Workforce Commission tax rates, checked Oct 16, 2026.

Agencies rarely publish markups, so ask for the bill rate and the pay rate side by side. In this case, anything more than 8.34% above the pay rate is workers' comp, benefits, recruiting cost and margin. Workers' comp rules differ: Texas lets most private employers opt out, while New York requires coverage for temporary and leased workers. State rates are in 2026 SUTA rates and comp costs in workers' comp cost.

Temp agency vs PEO, EOR and RPO

Temp agency: finds the worker and employs them for the assignment.
PEO: you find and manage your own staff; the PEO co-employs them for payroll and benefits (employee leasing).
EOR: employs a worker you chose, usually abroad; see EOR vs staffing agency.
RPO: recruits for you, and the hire joins your payroll (RPO).

A temp is not a contractor. Paying agency-placed workers directly on a 1099 creates the risk covered in employee misclassification.

Frequently asked questions

What is a temp agency?

A temp agency is a staffing company that hires workers as its own employees and assigns them to client businesses for a set period. The client directs the work; the agency pays the worker and bills the client.

Do temp agencies pay you, or does the company?

The agency pays you. It withholds income tax and Social Security and Medicare (7.65% in 2026) and issues your W-2. The client pays the agency's invoice.

What is a temp agency job?

It is a job you hold as the agency's employee while you work at a client's site, for days, weeks or months. Some assignments are temp-to-hire, where the client may hire you after a set period.

Is a temp agency the same as a staffing agency?

A temp agency is a kind of staffing agency. Staffing agencies also do permanent placement, where the worker joins the client's payroll and the agency earns a one-time fee.

Sources (6)

IRS: Publication 15 (2026), Employer's Tax Guide (checked Oct 16, 2026)
IRS: Instructions for Form 940 (checked Oct 16, 2026)
Texas Workforce Commission: Tax rates (checked Oct 16, 2026)
Texas Department of Insurance: Workers' compensation for employers (checked Oct 16, 2026)
New York Workers' Compensation Board: Coverage requirements for for-profit businesses (checked Oct 16, 2026)
IRS: Independent contractor (self-employed) or employee? (checked Oct 16, 2026)

This page is general information, not tax, legal or accounting advice. Rules and rates change, so check the official source linked above before you file or sign a contract. Read our disclaimer.