Paychex reports modest rise in small-business wages in October

Small businesses raised hourly wages a moderate amount in October, although job growth slowed slightly compared to last year, according to a report Tuesday from payroll giant Paychex.

The Paychex | IHS Markit Small Business Employment Watch, which Paychex compiles with the research firm IHS Markit, indicated the tight labor market caused a dip in job growth, but an uptick in wages. The Small Business Jobs Index declined 0.06 percent in October to 99.12, a drop of 1.28 percent over the past two years, in line with the falling unemployment rate.

“Job growth is down about 0.8 percent from last year,” said Paychex president and CEO Martin Mucci. “We would expect that to some degree with the unemployment rate. Small businesses in particular are finding it hard to find the right employees for positions.”

Paychex recently did a separate report on small-business sentiment that indicated business owners are feeling upbeat about the economy, but are having a hard time finding appropriate staff to allow them to expand.

The rate of hourly earnings growth in October was 2.41 percent ($0.63), the second consecutive monthly increase. “We saw hourly earnings growth pick up about 2.4 percent,” said Mucci. “That’s pretty good but not as good as we would think it would be. Not as many small businesses have the flexibility to raise wages because they didn’t gain as much from tax reform. They don’t have as much flexibility as larger businesses to push wages up.”

The top region of the country for employment growth was the South, but for wage growth it was the West. “The Southeast and the Southwest were the strongest,” said Mucci.

Texas ranked at the top among states in terms of jobs growth at small businesses, while Arizona was in first place for wage growth. Among metropolitan areas, Denver stayed in first place in terms of jobs growth, while Phoenix retook the lead on wage growth. Dallas, Houston, and Tampa also enjoyed strong job growth at small businesses. Riverside, California and Denver also had strong wage growth.

Construction job growth remained strong in October, but manufacturing job growth slowed. After strong gains in 2017, wage growth in the "Other Services (Except Public Administration)" sector has slowed significantly, however, and is now below 1 percent. As with job growth, wage growth in the construction industry has remained solid and consistent, but behind the leisure and hospitality industry. Hourly earnings growth across industries has stayed just above 3 percent since April 2017.

Paychex small business wage growth

In the month ahead, accountants should keep their small-business clients informed about the implications of the new tax law. “The one thing we’re seeing is the IRS coming out with communications advising accountants to make sure that small businesses are paying attention to how tax reform affected them,” said Mucci. “The sole proprietors, partnerships and S corps can deduct 20 percent of their qualified business income under some circumstances and write off the cost of their depreciable assets in the first year they are placed in service. Accountants should pay attention to the details of tax reform and that employees have the proper withholdings. Most employees don’t have the right amount of withholdings.”

There are also new regulations when it comes to fringe benefits such as transportation reimbursements, moving expenses, and other tax law changes that can be found on IRS.gov. Mucci also recommended that accountants make sure their small-business clients’ HR departments are providing anti-discrimination and sexual harassment training or partner with someone who does.

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