Payrolling

How payrolling works

1. The client finds the worker: a former employee, a retiree, an intern, a referral, someone from its own talent pool or direct sourcing program.
2. The client agrees the pay rate and assignment terms with the worker.
3. The payrolling firm onboards the worker as its W-2 employee: Form I-9, W-4, background check if required, and any state new hire reporting.
4. The worker submits hours; the firm runs payroll, withholds and pays taxes, carries workers' comp and unemployment insurance, and provides any required benefits such as paid sick leave or ACA-compliant coverage.
5. The firm bills the client the pay plus a payrolling markup.

The client still directs the work day to day. The payrolling firm is the legal employer for payroll and statutory purposes.

Why companies use payrolling services

• Headcount limits. The worker does not count against approved employee headcount.
• Short engagements. Bringing back a retiree for three months or hiring a summer intern without adding them to HR systems and benefit plans.
• Classification safety. Converting questionable 1099 contractors to W-2 employment with a third party reduces misclassification risk.
• Speed. Onboarding through a payroller can take days where internal hiring takes weeks.
• Multi-state reach. A national payroller is already registered in states where the client is not.

In enterprise programs, payrolling is often the employment layer underneath a direct sourcing program: the company builds its own pool of contingent workforce talent and uses a payroller to employ them, instead of paying full agency markups.

What payrolling costs

Payrolling markups cover the employer's statutory burden plus a small service margin. Statutory burden alone (employer FICA at 7.65%, federal and state unemployment, workers' comp) commonly runs 10% to 20% of wages depending on state and job class. Total payrolling markups often land somewhere around 15% to 30%, against 35% to 60% or more for a standard temp order where the agency also recruits.

Example. A university health system payrolls a retired nurse educator at $60 an hour for 20 hours a week over 16 weeks (320 hours). At a 22% payrolling markup the bill rate is $73.20, and the engagement costs $23,424. Through a full-service agency at a 50% markup, the same hours would cost $28,800.

Payrolling vs employer of record vs PEO

The terms overlap and are used differently by different vendors.

• Payrolling usually means a US staffing firm employing individual contingent workers the client recruited, for temporary or project assignments.
• [Employer of record](/glossary/employer-of-record/) usually means a provider that legally employs workers in countries or states where the client has no entity, often for long-term or permanent roles.
• PEO means co-employment of the client's whole regular workforce to pool benefits and HR administration. The client remains a co-employer.

The practical difference is scope: payrolling covers a set of contingent workers; a PEO covers your employees.

Risks and compliance

• Joint employment. The client directs the work, so it can still be a joint employer for some purposes, such as wage-and-hour or discrimination claims. Payrolling reduces risk but does not remove it.
• Overtime and wage rules. Make sure hours worked across client systems reach the payroller accurately, including overtime and state meal-break premiums.
• ACA. Payrolled workers averaging 30 or more hours a week may need offers of coverage; confirm which party is responsible.
• Long tenure. Workers payrolled for years doing core work start to look like misclassified employees. Many companies cap payrolled assignments at 12 to 24 months.

Rules vary by state and country.