Workers’ Compensation, Unemployment Insurance and Payroll Taxes When Buying a Staffing Agency
A staffing agency is typically the employer of record for the workers it places, which means it carries the employer’s obligations for every person on assignment. Staffing agency payroll taxes, unemployment insurance and workers’ compensation are among the largest costs in the business, and problems in these areas can follow the company long after a sale. For a buyer, they are diligence items that deserve as much attention as the client list.
This article describes in general terms why buyers review these areas when evaluating an existing, operating staffing agency. Rules, rates and successor liability vary by state and by structure, and they change over time. Nothing here is tax, insurance or legal advice. Buyers should rely on qualified accountants, tax advisors, insurance professionals and attorneys.
Why These Costs Matter So Much in Staffing
In many businesses, payroll taxes and insurance are overhead. In a staffing agency, they are part of the direct cost of every hour billed. Changes in these costs can move gross profit directly, and an agency that has priced its services without accounting for them correctly may look more profitable than it is. See our guide to staffing agency valuation.
Payroll Tax Filings and Deposits
Buyers frequently ask for federal and state payroll tax returns, evidence that deposits were made on time and any notices, penalties or payment plans. Unpaid payroll taxes can be a serious matter, and in some situations liability may extend beyond the company itself. A qualified tax professional can help a buyer understand what the records show and how the transaction structure may affect exposure.
Unemployment Insurance
Because temporary assignments end regularly, a staffing agency’s unemployment experience can differ from that of other employers. Buyers may review state unemployment accounts, claims activity and notices. Whether an account or its history transfers with the business depends on state rules and on how the transaction is structured, and should not be assumed.
Workers’ Compensation
Workers’ compensation costs depend on the type of work the agency’s people perform, the states where they work and the agency’s claims history. Light industrial work and clerical work can carry very different exposure. Buyers may review:
- Current and prior policies and how coverage is arranged
- Premium audits and any adjustments owed
- Claims history, open claims and reserves
- Whether workers are classified by job type correctly for coverage purposes
- Safety practices and how the agency evaluates client worksites
An insurance professional can help a buyer interpret these records and understand how coverage might be arranged after closing. Policies should not be assumed to transfer.
Client Contract Requirements
Master service agreements frequently require specific insurance coverage and allocate responsibility for workplace injuries. Buyers should compare what contracts require with what the agency carries.
Connections to Employment Compliance
How workers are classified and paid affects payroll taxes and insurance. Misclassification or wage-and-hour problems can create tax and insurance consequences as well as legal ones. Our article on staffing agency employment compliance covers these issues.
What to Request in Due Diligence
- Payroll tax returns and deposit records for several years
- State unemployment account statements and notices
- Workers’ compensation policies, audits and loss runs
- Correspondence with tax and labor authorities
Our staffing agency due diligence checklist covers the broader review.
How Lenders View These Items
Lenders may ask for evidence that payroll taxes are current and may treat unresolved tax or insurance issues as a significant concern. Our article on staffing agency loan requirements explains what lenders frequently review. Sellers can find preparation tips in our guide on how to sell a staffing agency.
US Professional Funding helps buyers finance the acquisition of existing, operating staffing agencies. Learn more about our staffing agency acquisition financing.
