Paychex sees slowdown in small business job growth in March

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Job growth at small businesses dipped slightly last month, according to payroll giant Paychex, although the pace of wage growth saw some gains.

The March edition of the Paychex | IHS Markit Small Business Employment Watch, which Paychex compiles with the research firm IHS Markit showed the Small Business Jobs Index slipping 0.12 percent to 99.65 compared to February, and slowing 1.07 percent since March 2017. Hourly earnings, however, grew $0.69 in the past year to $26.48, providing 12-month wage growth of 2.66 percent. That was virtually unchanged, though, from the 2.67 percent year-over-year growth in February. Thanks to continued increases in hours worked, weekly earnings growth was higher than the hourly earnings growth, at 2.90 percent. The tightening job market could be contributing to slowing job growth and increasing wage growth.

“With the unemployment rate hanging at about 4.1 percent for the last five months, the lowest in 17 years now, it is a tightening job market,” said Paychex president and CEO Martin Mucci. “More than 50 percent of small businesses say they’re hiring. Their biggest issue is finding and hiring qualified workers. What you see in the index is that job growth in small businesses has decelerated from last month and from last year. It's down about 1 percent from last year. There’s still moderate job growth, but it’s more difficult to find the right people and recruit them into your company.”

In terms of regions and industries, the South had strong job gains in construction and manufacturing over the past year. The West ranked highest in wage growth. Tennessee rose to the top of the list in terms of state job growth. Arizona stayed in first place in annual hourly earnings growth. Denver regained the top spot among metropolitan areas in small-business job growth. Phoenix continued to lead in small-business wage growth. The construction industry maintained steady job growth at 100.42 on the index, while leisure and hospitality led the industry sectors in hourly earnings growth.

“From a job growth perspective all of the industry sectors are pretty much down,” said Mucci. “They’re all showing moderate growth, but they’re still down. I think leisure and hospitality is still by far the strongest growth from our index standpoint, but they’ve dropped off from last year. From a region standpoint, it’s pretty much slower across the U.S. Again it’s moderate growth, but slower, and the South is still the strongest overall, even though it’s dropped from last year.”

He believes the South is showing the most growth from the construction industry and the leisure and hospitality sector because that part of the country is still recovering from the spate of hurricanes last year. “There are still housing repairs and things like that are going on,” said Mucci. “There are also more workers. There’s been more of an influx of people to the South. There are more workers for some of the leisure and hospitality jobs. Where it’s more difficult in all jobs — manufacturing too — is to find enough qualified workers now, because the unemployment rate is so low.”

Wages are seeing a partial boost from some of the minimum wage increases that took effect in some states and cities at the start of the year, along with some employers raising salaries after the passage of the Tax Cuts and Jobs Act last December. “From a wage standpoint, it did decelerate a little bit from last month, compared year over year,” said Mucci. “We’re down to about 2.66 percent. However, if you took the one month, March over February, and annualized it, that’s closer to 3 percent. It’s about 2.94 percent, so we definitely could be seeing the impact of some wages being raised from tax reform savings, and also minimum wage increases.”

Tax reform and the minimum wage increases seem to be playing a role in take-home pay going up for many employees. “We’re seeing on wages for our clients and from the sample we’ve taken about a 1.9 percent increase in the average paycheck,” said Mucci. “You can take that to be $600 to $700, which could be a combination of minimum wage, but tax reform also. It certainly is impacting some of these paychecks.”

The IRS has been telling people to check the withholding on their paychecks with a new withholding calculator on their website. Accountants can advise their individual clients to do that, and explain the implications of the new tax law to small business employers. However, many employers are also still dealing with the Affordable Care Act, which imposed an employer mandate to provide health insurance to employees, also known as the employer shared responsibility provision. Even though the Tax Cuts and Jobs Act repealed the individual mandate requiring people to have health insurance coverage for themselves and their families, it left in place the employer mandate.

“A few things that we’re seeing out of the IRS and the Treasury right now is that the IRS may come down a little bit stronger on enforcement of the employer shared responsibility provision,” said Mucci. “Even though health care reform has kind of been muddled a little bit, there still are reporting requirements, and the Treasury is pushing the IRS to be a little bit more disciplined in their enforcement of that. I think you will see some more enforcement to be sure that they’re reporting the requirement under the employer shared responsibility provisions. Then also with all the tax reform changes, the IRS is encouraging people to look at their withholdings. CPAs and accountants can certainly help them take a look at what their withholdings are, what they’re doing with their employees, and what their tax reform impacts could be and how best to use those, based on what some of the larger companies are doing in particular. They can invest more or they can bring it to the bottom line. They can raise pay. There are a number of things that accountants can probably help them work through from a business perspective.”

Accountants should also be careful about potential phishing attempts this tax season as cybercriminals try to get information about their clients. “The IRS has come out recently and said that they saw an increase in the number of phishing or malware incidents during 2017 and warned that the attacks could increase during the tax filing season,” said Mucci. “There’s some fraud that’s directed at trying to get at individual taxpayers, but also now they’re going after tax professionals, payroll professionals and accountants to try to get into their systems and get information. The accounting community should be careful about these phishing attacks and advise their clients to do so as well.”

Tax pros, accountants, small businesses and individual clients should also be aware of the efforts in some states such as New York, California and New Jersey to provide workarounds to the new tax law to allow taxpayers to claim the full state and local tax deduction.

Over the weekend, New York State passed a budget that provides a voluntary payroll tax option for employers. Employers would be able to opt-in to a new Employer Compensation Expense Program, or ECEP, structure. Employers that opt in would be subject to a 5 percent tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years starting on Jan. 1, 2019. The current personal income tax system would remain in place, and a new tax credit corresponding in value to the ECEP would cut the personal income tax on wages to ensure state tax filers subject to the ECEP wouldn't experience a decline in take-home pay.

The budget also sets up two new state-run Charitable Contribution Funds to replace property taxes where taxpayers can pay money to support health care and education. Donations to these funds would provide a reduction in local property taxes via a local credit equal to a percentage of the donation. Paychex is based in Rochester, N.Y., so the provisions would affect its own employees as well as its customers.

“We’re taking a look at it,” said Mucci. “We haven’t seen the details yet, which are just coming out. It looks like it’s a voluntary payroll tax that the business can decide whether to do or not. Will it be worth it for them to put an additional tax on their employees’ pay to save them some state income tax? I think many businesses in New York will have to look closely at the details and how it will impact their employees. Will it make their employees better off, or will they not be? There was also a provision in there where you could pay your state income tax possibly to a charitable fund through New York State. Both are trying to offset the impact of losing the deductibility of the state income taxes for New Yorkers and at the federal level. There’s a lot to look at there. They’ll have to look at the details and see if it makes sense for their businesses.”

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