A growing share of small businesses fail to pay employees on time
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The share of small businesses missing payroll — failing to pay employees on time — is again rising, per new data from Gusto, a payroll platform, shared exclusively with Axios.
Why it matters: Small companies are struggling to manage through economic challenges like high inflation and federal policy changes with fewer resources than big companies to handle disruption.
The big picture: Collectively, these tiny employers are central to the U.S. economy.
- Gusto's analysis was confined to companies with fewer than 50 workers — more than 57 million people were employed by businesses of that size, per federal data.
Follow the money (or lack thereof): Missing a payroll is devastating for employees, many living check to check. Workers look for the exits after it happens. Owners often cut staff to fix the issue.
- "A missed payroll becomes a breaking point — a visible marker of financial stress that reshapes a business's future," writes Nich Tremper, a senior economist at Gusto.
- Within two quarters of a company missing payroll, headcount falls by 8 to 10% and doesn't recover for at least two years, per the analysis.
What they did: Tremper looked at payroll data from a random sample of more than 400,000 small businesses that use the company's platform, and weighted it to reflect the national distribution of companies by industry, size and region.
Zoom out: The past few years have been rough for small businesses — higher interest rates made it harder and more expensive to access credit.
- Inflation raised input costs.
- President Trump's new tariff regime was another hit. (Note that it's small businesses that are challenging these import duties at the Supreme Court.)
- Customers, dealing with similar problems and a weaker labor market, are less eager to spend money, according to some business owners.
Between the lines: Small businesses generally operate on tight margins — and any kind of delay in cash flow can trip them up. Think of a construction company that isn't paid in full until a job's completed, but must still pay workers.
- Falling short isn't uncommon — about a third of small companies experiences a temporary shortfall that bank balances can't cover, Gusto says. Typically, they're able to bridge the gap by borrowing money, transferring funds from a personal account or asking for invoices to be paid earlier.
- That's what happened to Michelle Johnson, who employs nine people at her day spa in San Luis Obispo County in California.
Zoom in: The past year was really slow, she says, far worse than the pandemic.
- Revenue was $525,000, down from $642,000 in 2024. And costs went up, too. Some customers were federal workers who lost their jobs during the DOGE cuts earlier in the year, she says.
- About a month ago, as payday approached, Johnson realized she didn't have enough in the bank — the first time that's happened in eight years.
- It was a near-miss; she was able to get a $10,000 loan from Square to cover it.
- "Payroll for me is not optional. There's too many lives depending on it."
