Agency and temporary workers in the United States
Reviewed by Mellow Editorial Team, HR & payroll content team
Hiring through a staffing agency or bringing on temporary workers can solve real workforce problems — but the employment law and tax obligations depend heavily on how those workers are classified and who is legally their employer.
The two main models: staffing agency vs. direct temp hire
When you engage a staffing agency, the agency is typically the employer of record. The agency hires the worker, handles payroll, withholds federal and state income taxes, pays FICA, and issues the W-2 at year end. You pay the agency a bill rate that covers the worker's wages plus the agency's markup for taxes, benefits, and margin. From a payroll standpoint, the worker does not appear on your books.
Direct temporary hires work differently. If you bring on a worker yourself for a fixed term or seasonal project — without an agency in the middle — that person is your employee. You run payroll, withhold taxes, file Form 941 each quarter, and issue a W-2 by January 31. The fact that the role is temporary does not change your obligations; the duration of employment is irrelevant to the tax and reporting rules.
Who is actually the employer — and why it matters
The "joint employer" question is the most important legal concept here. Even when you use a staffing agency, a court or federal agency (such as the Department of Labor or the NLRB) may find that you and the staffing agency are both employers if you exercise sufficient control over the worker's day-to-day activities — setting their schedule, directing their tasks, controlling the work environment.
Joint employer status can expose you to liability for wage and hour violations, discrimination claims, or workers' compensation gaps even though you never issued that worker a paycheck. The fact that your contract with the agency says the agency is the employer is not conclusive; regulators look at economic reality and control, not just contract language.
Before signing an agency agreement, review what indemnities and insurance the agency carries, and be clear internally about how much direction your managers will give to placed workers.
Tax and payroll responsibilities in each model
Agency-placed workers: Your main obligation is to pay the agency's invoices on time. You do not withhold taxes or file payroll forms for these workers. If a placed worker is later reclassified as your employee — because of how you managed them in practice — you could face back payroll taxes, penalties, and interest. Document the agency relationship carefully.
Your own temporary employees: The full payroll process applies. Federal income tax is withheld using the information on the worker's Form W-4. FICA contributions — Social Security at 6.2% on wages up to the annual wage base, plus Medicare at 1.45% with no cap — are split equally between you and the employee. If a worker earns above the high-earner threshold in the tax year, the additional 0.9% Medicare surcharge applies to their portion only; you do not match it. File Form 941 each quarter and provide a W-2 by January 31.
State income tax withholding depends on where the work is performed. States like Texas, Florida, and Washington have no state income tax; others have their own brackets and filing requirements.
Contractors placed through an agency: Some agencies supply independent contractors rather than employees. In that case the agency may issue a 1099-NEC rather than a W-2. Understand clearly which type of worker you are getting, because misclassification — treating an employee as a contractor — is one of the most common and costly compliance errors in US employment law.
At-will employment and the end of a temp assignment
US employment is generally at-will, meaning either party can end the relationship at any time without cause, unless a contract says otherwise. For agency-placed workers, ending the assignment is typically governed by your agreement with the agency — review notice periods and minimum-duration commitments before you sign. For your own temporary employees, at-will still applies, but any written offer letter or fixed-term agreement that implies a definite end date could limit your flexibility, so word those documents carefully.
Benefits, leave, and other entitlements
There is no federal statutory paid annual leave or paid sick leave, so temporary workers have no automatic federal entitlement to either. However, several states and cities have mandatory paid sick leave laws that apply regardless of how long someone has worked for you or whether they came through an agency. Check the rules in every jurisdiction where a worker performs services.
Agency-placed workers may be entitled to benefits from the agency itself depending on tenure and the agency's policies — that is the agency's concern, not yours, unless joint employer liability applies. For your own temp employees, evaluate whether they qualify for benefits under your plan documents; many employer-sponsored plans have eligibility waiting periods, but those must be structured to comply with ACA rules for applicable large employers.
If you're managing a mix of direct employees and placed workers across multiple states, payroll complexity compounds quickly. Understanding how to run payroll across multiple jurisdictions from a structural standpoint can help you build processes that scale.
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