Minimum wage increases in states across the country are helping drive up wages, although the rate of job growth at small businesses has slowed down, according to payroll giant Paychex.

The Paychex | IHS Markit Small Business Employment Watch, which Paychex compiles with the research firm IHS Markit, ended the year with a decline in small business job growth, but with wages higher compared to the previous year. The Small Business Jobs Index slipped to 99.70 in December, down 0.16 percent for the month and 0.78 percent for the year. On the other hand, at $26.14, hourly earnings in December gained 2.76 percent ($0.70) year over year and averaged a growth rate of 2.85 percent for 2017, up from the 2016 average of 2.75 percent.

“Basically what we’ve seen was almost a point less job growth from last December, but we still have moderate job growth,” said Paychex president and CEO Martin Mucci.

Small business wage growth

The South led the way among regions of the country in terms of employment growth last month, while the West ranked highest in terms of wage growth. Wages should climb even higher in some Western states in January, as minimum wage increases took effect with the New Year.

“All regions were down,” said Mucci. “The South was about the strongest. I think they’re probably seeing better housing starts there. Recovery from the hurricanes is still providing some contractor and construction work. And there’s also fewer minimum wage increases in the South. That definitely seems to have had an impact on job growth. Wages slowed to just under 3 percent, but we’re seeing about 2.8 percent over last December. The West had the strongest hourly earnings growth at about 3 and a half percent, and they had a number of places that had minimum wage increases, including Arizona and California as well.”

Small businesses are divided on the impact of the tax reform bill. “We just released the latest Paychex Small Business Snapshot research index we conducted in November, and about half of business owners believe tax reform will benefit them and about half don’t think so,” said Mucci. “You can assume many new businesses don’t have profits, so they probably won’t gain from lower tax rates without it. But the good news with that is the 50 percent, give or take, who said they were going to benefit from it. About 80 percent were going to invest in technology or equipment, but two-thirds agree it would allow them to increase wages. Hopefully with increasing wages they will start spending more. There’s more demand and then people start hiring more to keep up with the demand. That’s all good news.”

Accountants will be kept busy advising their small business clients about the impact of tax reform and the minimum wage increases that took effect on January 1. The 18 states seeing increases include Alaska, Arizona, California, Colorado, Florida, Hawaii, Maine, Michigan, Minnesota, Missouri, Montana, New Jersey, New York, Ohio, Rhode Island, South Dakota, Vermont and Washington State.

“When you think about CPAs, there are 18 new minimum wage levels in states, and there are 20 new city minimum wage levels effective 1/1, so they’ll be busy with their small businesses trying to help them keep up with that,” said Mucci. “There are a number of new HR compliance requirements, including New York State’s family leave policy, which is impactful. Even if you only have one employee, it applies to you. There are a lot of complex new rules, particularly on the state side and minimum wage levels that CPAs could help their clients with.”

Some small business clients may elect to reorganize the way their business is structured to take advantage of lower tax rates for corporations, while some employees may want to become independent contractors to take advantage of the new 20 percent pass-through tax deduction.

“It will be interesting to see how many of their clients will want to reorganize or consider organizing as a pass-through to leverage the tax treatment,” said Mucci. “I think CPAs will be very busy digesting the tax reform.”

The IRS is expected to produce updated withholding tables soon for the new tax reform bill. “We’re working closely with the IRS to go through all the rules and what’s going to have to change,” said Mucci. “We’re assuming it’s going to probably take a few weeks to figure it all out and then create all the new forms and get those out probably in the next four to six weeks.”

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