Small businesses raised pay slightly in February

Minimum wage increases in a number of states and localities helped boost payrolls a small amount in February at small businesses, according to a report released Tuesday by Paychex.

The Paychex Small Business Employment Watch indicated that hourly earnings growth among small businesses with fewer than 50 employees was 2.78% last month, remaining below 3% for the 16th month in a row. Weekly hours worked growth (-0.24%) among small business employees has been negative for 58 of the past 60 months.

"Some of the wage increase we think was due to a lot of minimum wage increases that came into effect Jan. 1 in 19 states and almost 50 cities and counties," said Frank Fiorille, vice president of risk management, compliance and data analytics at Paychex. 

In total, 88 jurisdictions (22 states and 66 cities and counties) will raise their minimum wage floors by the end of 2026, according to the National Employment Law Project. Of those, 79 jurisdictions (14 states and 65 cities and counties) will reach or exceed a $15 minimum wage for some or all employees in 2026, including 57 jurisdictions (four states and 53 cities and counties) that will reach or exceed $17. 

The Midwest remained the top region for small business employment growth for the 21st month in a row, according to Paychex, with Indiana (100.29) snagging the top slot among states in February.

Financial activities (99.90) overtook education and health services as the top sector for small business employment growth, signifying the first time in five years that financial activities ranked first among industries.

Fiorille noted that larger businesses seem to have increased their hiring, but small businesses are still having difficulty finding enough qualified employees, citing a recent study by the Federal Reserve Bank of San Francisco that found a slowdown in job growth from mid-2024 to mid-2025.

Fiorille doesn't believe the turmoil around tariffs is having as much of an impact on job growth at small businesses, especially in service industries. 

"For the most part, a lot of them aren't impacted as much as the big enterprise manufacturing companies that have to order stuff from overseas and get it in, versus the landscaper or dry cleaner, small mom-and-pop shop that really is just providing a service," he said.

So far, the tax season seems to be going smoothly for small businesses despite cutbacks at the IRS and the changes from the One Big Beautiful Bill Act. 

"We expect the average tax refund to be up 10 to 14%, so hopefully consumers will get a little bit more money in their pocket, along with businesses getting bonus depreciation and all the other stuff that was thrown into the OBBBA," said Fiorille. "Hopefully that will be a little bit of a tailwind to small businesses and consumers in the spring."