Employee Benefitsself-employedSmall Business

How to reduce small business labor costs (without paying employees less)

This blog post uses examples of real current small business clients. I’m taking this opportunity to reinforce that the stories and examples that I use in frequent public posts are never presented in a way that compromises the privacy or identity of the business or individual.


Small business owners feel the financial pressure of overhead expenses related to the cost of labor. The cost of labor is made up of two components: wages and overhead costs related to labor. These additional costs drive up the overall cost of labor and directly drive down the amount of money that is available to wages and other business operations. The primary overhead costs associated with labor are:

  1. wage taxes
  2. workers compensation insurance
  3. employee benefits
  4. payroll accounting

Taken together, these can add 40% or more to the cost of wages paid. Yet each of these can be managed to minimize cost. There are well proven strategies that can control and reduce these costs.

The traditional way to reduce wage taxes and personal income tax liability is to receive compensation in a form that is not taxable income. Retirement benefits, deferred compensation, qualified stock, non-taxable reimbursements and qualified employee benefits. One small company I’m working with this month will save over $1,000 simply by tweaking the way they reimburse employees for personally owned auto expense. Since a large part of small business wage tax costs is owner wage tax, it follows logically that individual tax planning has a big impact on wage tax strategies.

Workers compensation costs can be controlled the same way as wage taxes above. Amounts paid as reimbursements for home office or personally owned auto expenses, for example, reduces workers compensation costs. Proper employee classification is also a big cost determinant for small firms. Additionally, moving to a “pay as you go” system integrated with payroll tends to result in fewer misunderstandings and surcharges. One company avoided the cost of an annual wage audit surcharge that was a shocking $2,000 simply because they didn’t keep up with the insurance company’s required accounting paperwork. No more!

The field of small business employee benefits is challenging and complicated . Relatively few professional practitioners have ventured into this area of work. Small businesses tend to rely on commission-based firms and that limits the available options. The hot topics among my clients are: 1) moving from an ACA-dominated health care market to the post-ACA options, and 2) enabling access to both ACA health insurance premium subsidies and employer payment assistance. y small firm clients find that they must use all available methods to make health insurance affordable to their employees.

Payroll accounting costs can be controlled by “keeping it simple’ and through the use of integration and automation. This page describes how the smallest firms can lock in this cost at just $20 per week. Firms with more employees can develop customized cost saving strategies. One small firm saved $50 per month simply be switching its one employee to direct deposit instead of paper check.

Of course the net results are based on the ability of a small firm to implement these strategies at an affordable cost. It’s not easy but small firms can take steps to lower the overhead costs of expenses related to labor. I recommend that small business owners use an experienced specialist in this area who is not limited to any one approach or commission-based planning strategies. I’ve helped thousands of small businesses in all 50 states and DC with these issues over a span of my almost 38 year career in this field, yet I am always inspired to hear about the and challenges of small business owners. Please send a message to plan a time to discuss your wage tax cost planning.

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