External payroll services: what service businesses can safely hand off

Tuesday morning. You log in to Gusto, review hours, manually add three contractor payments that don't sync, double-check PTO balances, and approve the run. On Wednesday, you verify tax payments. On Thursday, an employee asked why their deposit was late. On Friday, you spend 30 minutes reconciling payroll in QuickBooks because the categories don't match.

Three to four hours every two weeks. You're the only person who knows how it all fits together. When you're on vacation, payroll waits, or someone makes expensive mistakes.For many growing firms, this is also the moment payroll starts bleeding into bookkeeping, reconciliations, and reporting. That overlap is exactly why more teams move toward integrated payroll and bookkeeping services instead of stacking tools or hiring additional back-office staff.

External payroll services can take this off your plate. But what do they actually handle versus what stays with you?

Here's the division: They handle all operational execution, processing, taxes, filings, compliance. You keep all strategic control compensation decisions, hiring, policies. You get 6 to 10 hours back monthly with zero compliance risk.

What they handle completely

External payroll services own the operational burden. Not just software access, comprehensive execution.

Processing every pay cycle

They calculate gross pay, deductions, net pay, and employer taxes for everyone, every period. You approve who gets paid and how much they get paid. They handle the mathematics, tax withholding tables, direct deposit files, and accounting entries.

No more Tuesday morning calculation checks. No more wondering if FICA percentages changed. No more manually adjusting for unpaid leave. They handle salaries, hourly workers, contractors, bonuses, commissions, and reimbursements. Every calculation follows current tax law. Every deposit hits on time, every entry posts to the correct account.

Managing all tax compliance

They handle federal income tax, FICA, FUTA, Medicare, state income taxes, state unemployment, local taxes, and specialized taxes. They remit payments to the appropriate agencies on schedule. They file quarterly and annual returns, as well as specialized reports. They monitor changing rates and adjust automatically.

Hire someone in Colorado? They know Colorado's requirements and start withholding correctly from day one. FUTA rates change? Your payroll reflects it. Employee moves from New York to Texas? They adjust withholdings without you having to research anything.

Most founders underestimate this until they hire their first remote employee in a new state and discover nexus obligations they didn't know existed.Payroll is usually the first place these obligations surface, but it’s rarely the only one. Income tax filings, unemployment reports, information returns, and local compliance stack up quickly. A structured year-end tax compliance checklist helps teams see what’s connected and what often gets missed.

Coordinating benefits

They integrate with your insurance carriers and 401 (k) providers to ensure premiums, contributions, and garnishments are processed correctly. They pull current premium amounts, calculate employee and employer contributions, process 401 (k) deferrals and matches, handle HSA and FSA contributions, and manage garnishments.

They reconcile discrepancies when your insurance carrier changes a premium mid-month. They adjust contributions when an employee changes their 401 (k) percentage. They ensure garnishment payments are directed to the correct agency and applied to the proper case number.

No more monthly surprises where your health insurer says you underpaid because two employees' family coverage kicked in mid-month and you missed the proration.

Handling year-end compliance

They generate W-2s and 1099-NECs, file them with federal and state agencies, deliver copies to workers by deadlines, handle corrections, and respond to questions. They produce annual unemployment reports, reconciliations, and specialized state filings. They maintain audit documentation, including pay stubs, tax confirmations, filing receipts, and compliance records.

IRS questions your quarterly filing from eight months ago? Your service finds the documentation, explains the calculation, and handles the response. Employee calls saying their W-2 shows the wrong address? They correct and re-file.

What stays with you

You keep the decisions that define your company. External services execute your choices. They don't make them.

Your compensation decisions

Base salaries, raises, bonuses, commissions. These reflect your business strategy, market positioning, and values. You decide what to pay new hires. You decide who gets raises and how much. You decide bonus eligibility and amounts. You decide commission structures.

The service processes whatever you decide. They don't recommend ranges, suggest bonuses, or advise on commissions. A compensation strategy requires business judgment that no vendor can provide, they don't know your financial constraints, competitive market, performance standards, or growth plans.

Your employment authority

Whom to hire, whom to terminate, and whom to promote. External vendors can't make employment decisions for your company. You decide to hire, approve the offer terms, and set start dates. You choose when employment ends, you determine final pay, and you authorize termination.

They process paperwork after you decide. They can't hire someone for you, can't terminate without authorization, can't change employment status. These decisions have legal, financial, and cultural implications requiring your judgment.

Your policy changes

PTO policies, remote work stipends, expense reimbursement, and benefits eligibility. These define your culture. You decide how much PTO employees earn, whether unused PTO pays out, how stipends work, what expenses qualify, and when benefits start.

They implement whatever policies you set. They track PTO according to your rules. They process stipends on your schedule. They enforce eligibility windows you define. But they don't set policies, those reflect your values about work-life balance and employee support.

Your approval workflows

You design the oversight structure. You decide who approves time-off requests, who authorizes bonuses, who reviews contractor payments, and who gives final payroll approval. These workflows prevent errors and maintain controls.

They enforce whatever approval structure you create. They require your designated approver to sign off. They route special payments through your workflow. They don't pay anyone without proper approval.

How the handoff works

The interface between strategic and operational happens through structured touchpoints. You maintain control through defined inputs and outputs.

Structured inputs

Data flows in one direction through standardized channels. New hire? Complete a form with start date, salary, position, and benefits. Raise? Submit the compensation change with the new amount and effective date. PTO? Approve it in your time tracker that feeds payroll. Termination? Submit a form with the last day and final pay details.

These inputs replace manual entry. The structure ensures nothing gets forgotten. Standardization means anyone on your team can submit information without requiring your personal knowledge of the system.

Processing approvals

Before each payroll run, you get a notification showing exactly what will be processed: who's being paid, how much, what changed, and when the funds transfer. You review and approve. Nothing processes without your explicit approval.

You maintain final authority while eliminating the need for calculations. You're not unquestioningly trusting, you're reviewing prepared output before execution. But you're examining a summary instead of building it from scratch.

Exception escalation

When something unusual happens, garnishment notice, tax agency notice, pay dispute, benefits discrepancy, they escalate it with context and recommendations. They don't ignore it. They don't decide without you. They bring it to your attention with enough information to proceed.

You stay informed about important issues without drowning in routine details. You hear about the IRS notice, not every successful tax payment. You hear about the garnishment needing legal review, not routine 401 (k) processing.

Financial reporting

After each payroll, you receive the data you need: total cost by department, tax liabilities by jurisdiction, benefits costs by category, and general ledger entries. These feed your budgeting, forecasting, and financial statements without manual generation.

The outputs integrate with QuickBooks or Xero, so data flows automatically. You get visibility without the export-import-reconcile cycle consuming Friday afternoons.

What this means

Most consulting firms with 10 to 50 employees spend 6 to 10 hours per month managing payroll internally or using basic software. External payroll services reduce that to 30-60 minutes monthly, just enough time to approve runs and review reports.

You maintain complete strategic control. You make every decision about who gets paid, how much, and under what policies. But you eliminate operational burden: calculations, tax compliance, benefits coordination, year-end filings, and audit documentation.

The question isn't whether you can delegate payroll. It's whether you can afford to keep doing it yourself.