What does payroll software do, and where does a payroll service take over?

Summary

Payroll software works out gross pay, withholding, deductions, and net pay, and keeps the records. A payroll service does that too, but it also takes on the deposits and tax filings that come with federal and state deadlines. The line between the two is those deadlines, and handing them to a provider does not move the legal responsibility off the employer.

A pay run, start to finish

Every cycle begins with inputs: hours, overtime, bonuses, leave, and any changes since the last run. From those, the system calculates gross pay, takes out taxes and deductions such as benefit premiums and retirement contributions, and arrives at net pay. The money goes out by direct deposit or check. Then come the parts people forget about, which are paying the withheld taxes plus the employer's share to the government, filing the returns that report them, and recording everything in a payroll register, pay statements, accounting entries, and year-to-date totals.

Software handles most of that cycle. The tax deposits and filings are the step that may still be yours.

The taxes involved on US wages

Federal income tax is withheld from the employee based on the Form W-4 the employee gives you. Social Security tax is 6.2% from the employee and another 6.2% from the employer, on wages up to $184,500 in 2026. Medicare is 1.45% from each side with no wage cap, and employees owe an extra 0.9% Additional Medicare Tax on wages above $200,000 in a year, with no employer match. Federal unemployment tax (FUTA) is paid by the employer only and is never withheld from pay. State income and unemployment taxes sit on top and vary by state.

Deadlines are where software and service part ways

The IRS calendar is fixed:

• Federal tax deposits must be made by electronic funds transfer, on either a monthly or a semiweekly schedule. Monthly depositors pay by the 15th of the following month.
• Form 941, the quarterly federal return, is due April 30, July 31, October 31, and January 31.
• Forms W-2 go to employees and to the Social Security Administration by January 31.

A payroll service makes those deposits and filings for you. What it cannot take is the liability. The IRS says the employer stays responsible for paying income tax withheld and both halves of Social Security and Medicare, and that if a third party defaults, the employer remains responsible for the deposits and for timely filing. Customers of an IRS-certified professional employer organization (CPEO) are the stated exception, since in certain situations they are relieved of that liability.

Terms you will see next to payroll in search results

Payroll plus HR bundles payroll with onboarding, time, benefits, and employee records. A PEO is a broader co-employment service. Global payroll runs pay in countries where your company already has its own legal entity, while an employer of record (EOR) hires people through the provider's local entity instead. Each is priced on a different basis, so none of them belongs in the same price table as ordinary payroll software.

Sources

• https://www.irs.gov/publications/p15
• https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes
• https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-due-dates
• https://www.irs.gov/businesses/small-businesses-self-employed/outsourcing-payroll-and-third-party-payers

Related on this site

• Payroll software pricing: the main page
• What payroll software costs, and where the money goes
• What payroll software pricing includes
• What should you compare before picking a payroll provider?
• Does a full-service payroll plan really take every payroll tax task off your hands?