Small business employment and wage growth held steady in May, says Paychex

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Job and wage growth at small businesses remained consistent in May, according to payroll giant Paychex, with the South continuing to lead among the regions in terms of employment growth, while the West stayed on top for hourly earnings growth.

“All the regions are kind of down from last year, but the South still stands out as the strongest,” Paychex president and CEO Martin Mucci told Accounting Today. “From a job growth perspective for small businesses, everything is pretty consistent. The big issue for small businesses is finding employees in this low-unemployment environment.”

The U.S. Bureau of Labor Statistics reported last month that the unemployment rate fell to 3.6 percent, the lowest level since 1969.

Hourly earnings growth across the country was slightly above the 2018 average, according to the Paychex | IHS Markit Small Business Employment Watch. Hourly earnings were up 2.53 percent in May, compared to an average of 2.49 percent last year. However, weekly earnings growth has moderated this year, as employers in some cases have responded to minimum wage increases by decreasing the weekly hours of employees.

“One of the things small businesses can do is to offer more job flexibility, with flexible hours, work from home and things like that to attract people in such a tough environment,” said Mucci.

Tennessee had the top spot among states in terms of small business job growth, while Illinois claimed first place on wage growth. In terms of metropolitan areas, Dallas was again the top metro area for job growth, while San Diego continued to lead metro areas on wage growth.

“As far as where the job growth is, it's still strongest in the South,” said Mucci. “Even though it's down from last year, Dallas is still number one by far. It's up 3.4 percent from last year.”

In terms of industries, manufacturing was the only industry with weekly earnings growth above 4 percent. But the strong hourly earnings gains in the leisure and hospitality sector of 4.59 percent are taking a hit from a significant decrease in weekly hours worked, which are down 1.70 percent.

“The lowest wage earners are still seeing the biggest increase, and that's nearly 4 percent over last year,” said Mucci. “The good news is while they're the lowest, they're getting the biggest increases from minimum wage increases picking up. They’re more difficult to find as well and to place in those positions so they're getting the bigger increases. At a little bit larger businesses of 20 to 49 employees, we are seeing hourly earnings up around 3 percent. Of course the larger businesses typically have more flexibility to reduce other costs or raise prices and they have a little bit more flexibility to get the wages up.”

The string of severe storms in the Midwest and South could have a mixed impact on small business hiring. “It'll certainly hurt small businesses in some respects if they've been flooded or if the residents have been flooded and therefore won't be able to use the small businesses,” said Mucci. “On the other hand we would expect to see construction pick up as the need for repairs and roofing pick up.”

The trade wars aren’t having an impact yet on small businesses, but that could change. “There was a survey that I saw last week that gave a number of about 60 to 65 percent of small businesses are not impacted generally by the tariffs because they're local businesses, like pizza shops, bagel shops and auto mechanics,” said Mucci. “There are certainly niche businesses that are impacted from a supply chain perspective or directly, but the majority of small businesses are locally run, independent businesses that won't be too impacted by tariffs. At least that's certainly what we continue to hope.”

He believes accountants should make their small-business clients aware of the IRS’s efforts to enforce payroll tax compliance. “One of the biggest things we're seeing is that the IRS is really continuing to try to pick up the enforcement campaign to battle noncompliance with payroll taxes,” said Mucci. “Payroll tax withholding accounts for over 70 percent of the revenue coming into the IRS, so they're conducting more education and more enforcement campaigns to go after those businesses that have been noncompliant in the past. Even though they’re always under headcount and budget constraints, they seem to be getting more aggressive in collecting payroll taxes. Make sure that your clients are in compliance with all the IRS rules because it’s getting more and more difficult.”

Last week, the IRS released a draft version of the new W-4 withholding form to reflect the extensive changes in the Tax Cuts and Jobs Act, and Mucci sees improvements over the IRS’s previous draft after it was stung by widespread criticism over some of the information it was asking about sources of household income.

“I think they're trying to make it a bit simpler and respond to some of the comments that came in,” said Mucci. “I would assume they're getting close to the final new form.”

He is also seeing some changes at the state level, for example, with New Jersey Governor Phil Murphy recently signing into law legislation requiring employers with more than 20 employees to have a pre-tax transportation fringe benefit. “You're seeing the states individually force new requirements and regulations on small businesses,” said Mucci. “I think that certainly will keep their accountants busy to try to help them maneuver through those issues.”

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