Payroll software fits if someone on your side owns payroll and has time for setup, approvals and the exceptions every pay run brings. A managed payroll service fits if nobody does. Either way, your company stays responsible for its federal payroll taxes: outsourcing the work doesn’t outsource that liability (IRS).
An employer of record (EOR) answers a different question: not who runs payroll, but who is the employer. This guide covers what each option does, who does each task, where the tax liability sits, and what to ask before you sign.
What software does, and what a payroll service does
Payroll software calculates pay and withholding from the information you enter. Full-service products can also pay employees, deposit taxes and file federal and state returns. What software doesn’t do is notice that a timesheet is missing, that a new hire’s state forms aren’t in, or that a letter from a tax agency needs an answer. Someone on your side does that.
A managed payroll service runs the process for you: it collects the inputs, checks them, processes the run, and handles corrections and agency notices, as far as your agreement covers. You still supply accurate information, approve each run and fund it.
So the useful question isn’t which features a product has. Software and a service can file the same returns. The difference is who handles setup, exceptions and notices, and whether that person exists in your company.
Who does each payroll task
The table shows possible arrangements, not any one provider’s package. What’s included depends on the product or agreement, so treat every “Varies” as a question to ask.
| Task | Payroll software you run | Managed payroll service | Employer of record |
|---|---|---|---|
| Legal employer | You | You | The EOR, for the people it employs |
| Register state tax accounts | You; some products help | Varies | The EOR, for its own accounts |
| Collect W-4 and state withholding forms | Employee completes; you collect, often in the app | Varies | The EOR |
| Form I-9 | You are accountable; an authorized representative can complete it | You are accountable | The EOR, as employer |
| Report new hires to the state | Varies | Varies | The EOR |
| Supply hours, pay changes and bonuses | You | You; entry method varies | You; entry method varies |
| Approve each pay run | You | You, by the agreed cutoff | You, by the agreed cutoff |
| Fund wages and taxes | You | You; timing per agreement | You pay the EOR’s invoice or funding request |
| Calculate gross to net pay | Software, accurate if set up correctly | Provider | The EOR |
| Pay employees by direct deposit | The software’s payment service, if included | Provider, if included | The EOR |
| Deposit payroll taxes | Varies | Provider, if included | The EOR |
| File federal and state payroll returns | Varies | Provider, for the returns the agreement covers | The EOR, for its employer filings |
| Year-end W-2s | Varies | Varies; may cost extra | The EOR; may cost extra |
| Answer tax notices and fix errors | You, unless you buy support | Varies | The EOR, for its own filings, with your cooperation |
| Federal employment-tax liability | You | You (see the next section) | Depends on the arrangement (next section) |
| Check tax deposits in EFTPS | You | You | Ask the EOR for evidence of its filings |
| Workers’ compensation | You arrange it (state rules) | You arrange it (state rules) | Ask who holds the policy and what it covers |
Two rows matter most. Whoever keys in the data, your company is the source of accurate hours and pay changes, and it approves each run. And the liability row doesn’t change when you outsource, as the next section explains. For new-hire reports, federal law allows up to 20 days from the date of hire, and some states require them sooner (ACF).
Outsourcing doesn’t move the tax liability
The IRS recognizes several kinds of third-party payroll arrangement, and they differ in who carries the liability (IRS, third party arrangements):
| Arrangement | Who is liable for federal employment taxes |
|---|---|
| Payroll service provider or reporting agent | Your company. The provider takes on none of your federal employment-tax liability |
| Section 3504 agent (appointed on Form 2678) | Shared: the IRS can collect income tax withholding, Social Security and Medicare tax from you or the agent. It generally doesn’t cover federal unemployment tax |
| Certified professional employer organization (CPEO) | Generally the CPEO alone, for wages it pays to work site employees under a CPEO contract. For other employees, both may be liable (IRS, CPEO customers) |
| Employer of record or uncertified PEO | Depends on the arrangement. Filing under the provider’s employer ID number or a clause in the contract doesn’t settle it by itself (IRS, PEOs) |
“No liability” here means no federal tax liability. A provider can still owe you money under your contract for its own mistakes, so ask who pays the penalty if a deposit is late because of the provider’s error.
When your company’s employer ID number is used, the IRS recommends two checks (IRS, outsourcing payroll duties):
- Enroll in EFTPS with your own PIN and check periodically that deposits arrive.
- Keep your own address as the IRS address of record, so tax notices reach you and not only the provider.
An EOR is a different decision, not a bigger payroll plan
Payroll software and a payroll service both assume your company is the employer. An EOR becomes the employer of the people it employs for you: it runs their payroll under its own registrations, while you direct their work.
Choose payroll support when your company should be the employer and is set up to be: registered in the states where your people work, with workers’ compensation in place. Consider an EOR when your company isn’t set up to employ there yet, or shouldn’t be for a particular hire. Our guide to EOR, PEO and hiring without an entity compares the models, and Can a Company With a US Entity Use an EOR? covers when a company with its own entity still uses one, and what stays with it.
Example: five people on weekly payroll
Hypothetical example. An overseas company’s US subsidiary employs five people, three hourly and two salaried, in California and Texas. All were hired at the start of 2026 and none leave during the year. They’re paid weekly on Fridays, and it’s the company’s first year of US payroll.
One week
| Day | Step | With software | With a managed service |
|---|---|---|---|
| Monday | Timesheets close; collect hours, time off, starters, leavers and pay changes | You | You send them to the provider |
| Tuesday | Review the draft payroll and approve it | You | Provider prepares it; you approve |
| Wednesday | Wages and taxes taken from the company account | You fund | You fund |
| Friday | Employees paid; pay statements issued | Software | Provider |
The timetable is illustrative: each provider sets its own cutoffs and funding days. A correction after approval, such as a missed overtime hour or a late new starter, may need an off-cycle payment, an amended filing or another adjustment. That is where a managed service earns its fee, and where a self-run setup needs someone who knows the rules. California’s final pay deadlines are one example: they don’t wait for the next run.
One year
| Task | How often | Count in this example |
|---|---|---|
| Pay runs and approvals | Weekly | 52 (2026 has 52 Fridays); off-cycle runs are extra |
| Deposits of income tax withholding, Social Security and Medicare | Monthly, as a new employer | 12 |
| Form 941 | Quarterly | 4 |
| Form 940 (federal unemployment) | Yearly | 1 return; federal unemployment tax is deposited separately once it exceeds $500 |
| California DE 9 and DE 9C | Quarterly | 4 of each |
| Texas C-3 and C-4 (Employer Quarterly Report and Wages List) | Quarterly, filed online | 4 |
| Forms W-2 | Yearly; for 2026 wages, by 1 February 2027 | 5 (filing online creates the W-3 transmittal) |
| New-hire reports | Each new hire | 5 employee records |
The counts measure different things (runs, deposits, returns and employee records), so they don’t add up to one workload figure. A new employer deposits monthly in its first year because its lookback period counts as zero, unless it builds up $100,000 or more in tax on any day during a deposit period (IRS Topic 757). California may also require state income tax and SDI deposits more often than quarterly (EDD), and Texas wage reports are filed online (TWC). For the rest of California’s rules, see our California payroll guide.
Fees for a managed service depend on headcount, pay frequency and which of these tasks are included, and some providers price year-end forms separately.
Questions to ask before you choose
These work for any software vendor or payroll service.
| Area | Questions to ask |
|---|---|
| Coverage | Which states can you run? Which pay frequencies? Contractors on 1099s as well as employees? Local taxes where our people work? |
| Setup | Who registers our state tax accounts, you or us? What do you need before the first pay run, and how long does setup take? |
| Filing | Which deposits and returns do you make for us: federal, state, local? Who reports new hires? Are W-2s included, or extra? |
| Liability and errors | Are you a payroll service provider, a reporting agent, a Section 3504 agent or a CPEO? If a deposit is late because of your error, who pays the penalty? |
| Notices | If a tax agency writes to us, who answers it? |
| Funding | When are wages and taxes debited, and how many days before payday? In what currency? |
| Time and approvals | Do you include time tracking, or connect to ours? Who approves each run, and what is the cutoff? |
| Corrections | How are off-cycle runs and corrections handled, and do they cost extra? |
| Reports | Which payroll and cost reports do we get, and can finance export them? |
| Support | Who do we contact, in which language and time zone? |
| Exit | If we leave, do we get year-to-date records and filings in a usable format? Is there a fee? |
Please note: This is general information about running US payroll through software or a payroll service. Responsibilities depend on the product, the agreement, the states involved and your federal tax arrangement, so confirm them with your provider and tax adviser before you sign. Sources checked 21 October 2026.
Want us to run your US payroll?
Tell us your current system, the states your people work in, how often you pay, your headcount and which tasks you want off your desk. We’ll tell you what we would take on and what stays with you, and we reply within one business day.