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4 Reasons Your Payroll Costs Will Soon Explode

Whether you like it or not, the facts are that your payroll costs will be exploding over the next few years.
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What are the three biggest line item expenses on your income statement? If you're like most companies, the three are taxes, materials and payroll. If you're in the service business it's just taxes and payroll. Since the recession, payroll costs have not risen very much. And during this period, with unemployment high, the threat of losing key employees was not substantial. And the opportunities for finding talented people at a bargain were a-plenty. But no longer.

In the next few years you will see an explosion in your payroll costs. They will rise, overall, between 5 and 10 percent depending on your industry and your region. Whether it is the wages you pay or the cost of benefits such as healthcare, you'll be spending more to employ. Why?

1. There will be an increase in the national minimum wage.

It's a foregone conclusion that minimum wages will be going up. People like to point to Washington State and San Francisco--two places with some of the highest minimum wages in the country that have also experienced significant economic growth--as one of the most persuasive arguments why an increase is justified. But that's not really the reason. (Your state would grow more than the sickly national average, too, if you had companies like Amazon, Microsoft and 10 zillion venture capital firms from Silicon Valley located there.)

The real reason is because companies like Walmart are now caving. They're adjusting to the political landscape. And let's face it: $7.25 an hour is pretty darned low no matter how you slice it. I wouldn't expect the federal minimum wage to go as high at $15 per hour like the mayor of Seattle is proposing. But if you're still paying the minimum, you can expect to see this go up to somewhere around $10 per hour sometime in the next year or so. That's a 43% increase by the way.

2. Your healthcare costs will go up.

Most business owners I know, regardless of the number of people they employ, are steeling themselves for an increase in premiums over the next few years. The reason is math. There are between 30 to 34 million uninsured in the U.S. These people were, as of Jan. 1, required by law to get insurance. The insurance companies are now required by law to provide a host of essential benefits in return for this huge new market of customers. Except as of now, most of these 30 to 34 million haven't shown up. In fact, only 26 percent of the people that signed up on healthcare.gov did not have health insurance, according to survey this week. What happens if the rest of the uninsured--the young, the evasive, the gamblers--don't show up? Who will pay for those increased health costs that our insurance companies are now required to provide? Yeah, you guessed it. And so have many business planners.

3. Inflation will go up.

No, we're not looking at double-digit inflation over the next few years. But it's a foregone conclusion that prices are rising. In fact, the Fed wants inflation. There will have to be inflation in order to draw down on their vast balance sheet in an orderly manner. And inflation can be a good thing, contributing to an economy's growth. But higher prices means higher wages. And your employees will not want to settle for the typical 1 to 2 percent salary increase you've been dolling out over the past few years. You can expect wages to rise anywhere from 2 to 5 percent depending on the job, your industry and your region. So start budgeting. And remember that this increase will contribute to higher employer taxes and more contributions to retirement plans, too, as these amounts are generally tied to salaries.

4. The job market will tighten.

Regardless of how you calculate it, unemployment continues to decrease. Weekly job claims last week were at their lowest reading since May, 2007. This is good news for employees: The labor market is heating up. This is not good news for you. Your employees are looking around. And some are going to jump ship. To stay competitive, you'll need to pay more or at least offer more benefits. If you lose that key employee, you'll suffer from a loss in productivity and incur unexpected costs to train and bring on board a replacement (who will likely be earning a higher salary). You will be challenged to keep your key people happy while finding and paying for new people in a growing economy. You will be challenged to find skilled workers and be forced to pay for more training to get those new people up to speed too. Make no mistake: These are good problems to have when compared to the problems you had a few years ago. But no matter which way you look at it, your costs will be higher.

Are you against an increase in the minimum wage? Do you oppose the Affordable Care Act? Are you frustrated with the Fed's handling of the economy? Do you not like the president or the Congress or the entire federal government? None of this should matter. You are a business owner, not a politician. You can express your political views inside the voter's box. In the meantime it is your responsibility to deal with the facts. And, whether you like it or not, the facts are that your payroll costs will be exploding over the next few years.

So now you should ask: What to do? What actions to take? How to manage? What's the plan? I've got a few suggestions...next week.

IMAGE: Getty Images
Last updated: May 21, 2014

GENE MARKS | Columnist | Owner, Marks Group

Gene Marks is a columnist, author, and small-business owner. He oversees the Marks Group, a 10-person technology consultancy to small and medium-size businesses. A certified public accountant, Marks has also worked in the entrepreneurial services arm of KPMG. He writes for The New York Times, Forbes, and The Huffington Post.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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