Small business wage growth slowed in 2025

Hourly earnings growth at small businesses continued to decelerate in December, reflecting a pattern for much of the year, while job growth also moderated, payroll provider Paychex reported Tuesday.

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The Paychex Small Business Employment Watch showed the hourly earnings growth rate at 2.71% in December, closing the year below 3% for the 17th month in a row. The Small Business Jobs Index component of the report, which reflects the payroll data of Paychex’s customers with fewer than 50 employees, indicated minimal change throughout the year and averaged 99.67 in 2025. Weekly hours worked growth ended the year up 0.25%, reaching the highest level since May 2021. 

The Midwest ranked as the top region for small business employment growth for all of 2025, although it tied with the Northeast with a 99.65 jobs index in December.

Indiana started and ended the year ranked in first place among states for small business employment growth at 101.50, averaging an index level of 100.52 in 2025.

Education and health services, with an index level of 100.49 in December, led industry sectors for small business job growth every month in 2025 and has reported positive growth for nearly five years in a row.

“From an overall standpoint, it’s a little bit less employment growth,” said Frank Fiorille, vice president of risk management, compliance and data analytics at Paychex. “It’s low fire, low hire. You’re not seeing a lot of layoffs or firings, but you’re also not seeing a lot of new job growth either.”

He sees a bifurcated job market, with the Midwest doing better than the East and West Coasts, and education and health services doing well compared to other sectors. The number of hours worked by small-business employees has been volatile in recent months, spiking before declining in the fall months and then rising again in December. 

“It could be a precursor to potentially more hiring down the road as small and medium-sized businesses are trying to get as much out of workers as possible,” said Fiorille. “It just comes to the point where they need to hire more people.”

He advises accountants to keep an eye on the changes from the One Big Beautiful Bill Act for their small business clients, who will be able to write off more expenses. Businesses will also need to keep track of the new tax deductions for tips and overtime for their employees. The Internal Revenue Service offered temporary penalty relief for the information reporting requirements for tax year 2025, but businesses will need to be more careful this year as the IRS and the Treasury continue to roll out and finalize more guidance on the tips and overtime deductions. 

Separately, another payroll provider, Gusto, reported Tuesday that U.S. small business hiring rebounded in December after a “volatile fall” in November, adding 47,900 net new jobs. The hiring gains were broad-based across industries, led by health care, administrative services and professional services. The retail and hospitality industries returned to a positive hiring trend, easing fears of a weak holiday season. The Northeast and Midwest posted the strongest regional growth, while the South remained solid overall. Larger small businesses with 20 to 49 employees drove much of the rebound in December.