Higher Costs, Tighter Cash: How the Economy Is Pressuring Small-Business Payrolls

Key Findings

• U.S. economic pressures have made missing payroll more widespread. The increase in missed payrolls coincides with a period of elevated inflation, higher interest rates, and rising wages. From 2019 to 2025, the number of affected employees rose by more than 300,000, and 125,000 additional businesses experienced at least one missed payroll in an average quarter. Nearly every industry saw an increase, with hospitality, wholesale trade, and agriculture facing the sharpest growth.

• It’s very common, and often temporary, for a small business to have low amounts of cash around payroll time. About one-third of small businesses encounter at least one payroll where available balances cannot fully cover wages. Most bridge the gap through short-term financing or cash transfers, but those that cannot face persistent employment losses.

• After a missed payroll, the average small business’s headcount declines by 8 to 10 percent and does not recover within two years. Missed payrolls have lasting effects on companies and workers.

• Cash reserves determine who can withstand business surprises. When cash runs tight, it’s usually because the cushion just isn’t there. Small businesses that have ever fallen short on payroll keep only about a month of payroll on hand, while those that always make payroll have roughly four months’ worth saved. Since mid-2023, that gap has widened: stronger firms have increased their liquidity while others have not. This divide leaves many businesses operating within days of a liquidity crunch.

• Preventing missed payrolls strengthens resilience. Because most shortfalls are temporary, targeted interventions—such as faster access to credit or improved cash-flow management tools—could prevent many businesses from falling into costly payroll failures. Reducing the frequency of missed payrolls would protect American jobs, sustain trust between employers and employees, and improve U.S. small-business stability overall.

Executive summary

For millions of Americans, the stability of a paycheck depends on the thinnest margin of cash flow. In 2024, more than 3 million employees at small businesses experienced a missed payroll. This is a small but meaningful tremor in the economy that disrupts families, workplaces, and communities.

Since 2019, the share of small businesses unable to make payroll on time has surged by more than 50 percent, rising from about 1.5 percent to 2.3 percent. That shift may sound small, but across roughly six million employer small businesses, it translates to about 774,000 in 2024—up from 543,000 six years ago. The cumulative effect is stark: more owners delaying paydays, more workers scrambling to cover rent, and more local economies feeling the strain.

These findings come from Gusto’s analysis of payroll transactions and linked business bank accounts from 2019 through 2025. The data reveal that most missed payrolls stem not from failing businesses but from temporary cash shortfalls. Yet the consequences can be lasting.

A growing vulnerability

Small businesses are the backbone of U.S. employment, accounting for nearly 60 million jobs. When they falter, the impact ripples quickly. Between 2020 and 2025, small firms faced overlapping pressures: pandemic disruptions, persistent inflation, and sharply higher interest rates. The Federal Reserve’s benchmark rate rose more than five percentage points during this period, multiplying borrowing costs for firms that rely on revolving credit or short-term loans to fund payroll.

This chart shows how the number of workers affected by missed payrolls has climbed steadily since 2019, reaching roughly 3.4 million employees in 2024. The increase mirrors both the rise in missed-payroll rates and the concentration of these incidents among the smallest firms—those with fewer than ten employees. These micro-employers saw the sharpest proportional growth, becoming 44 percent more likely to miss a payroll in 2024 than in 2019.

The data make clear that even small, well-run businesses are vulnerable to timing mismatches between revenue and expenses. They may be profitable on paper, but cash-poor in practice—caught between higher wages, rising costs, and delayed payments from customers.

Across industries, a broad-based strain

This chart highlights how widespread the problem has become. Every major industry saw higher rates of missed payrolls by 2025. The sharpest increases occurred in wholesale trade, construction, and hospitality—sectors most exposed to input-cost swings and shifting consumer demand. In hospitality alone, the share of businesses missing payroll jumped roughly 30 percent, as higher wages and operating costs collided with thin margins.

The breadth of these increases underscores that missed payrolls are not isolated failures—they’re a systemic sign of liquidity pressure affecting nearly every corner of the small-business economy.

Cash-flow shocks with lasting fallout

Bank-linked data show that about one-third of small businesses experience at least one payroll where available funds cannot fully cover wages. The typical firm that ever falls short keeps only one month of payroll in reserve—versus four months for firms that never do. While stronger businesses have lengthened their cash runways since 2023, those already stretched thin have not, widening the liquidity gap.

When a payroll is actually missed, the damage extends far beyond the pay period. Within two quarters, the average affected business’s headcount falls by 8 to 10 percent and does not recover for at least two years. Employees who miss a paycheck are less likely to stay, and owners, once burned, often cut staff to avoid a repeat crisis. A missed payroll becomes a breaking point—a visible marker of financial stress that reshapes a business’s future.

Preventable losses

Most missed payrolls are temporary and solvable. Faster access to credit, real-time cash-flow tools, and smarter payment systems could prevent many of them altogether. Addressing short-term cash gaps could safeguard millions of jobs without heavy-handed intervention. Missed payrolls aren’t generally a signal of a business in trouble, they’re signs of temporary cash shortfalls. Treating them as such, before a temporary cash crunch becomes a lasting employment decline, could protect both workers’ livelihoods and the health of the broader labor market.

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Introduction

Small businesses are the backbone of their communities: providing essential services, creating jobs, and keeping local economies vibrant. There are more than six million employer small businesses in the United States, they employ nearly 60 million people, about 45 percent of the U.S. workforce. But their central role also means that when a small business struggles, the effects ripple quickly through households and neighborhoods.

For most small business owners, payroll is personal. Employees are not just staff; they’re people they know and care about. Nearly 70 percent of small business owners say they offer benefits because it’s personally important to them, not simply to stay competitive. Making payroll on time, every time, is another way they show that commitment.

That’s what makes a missed payroll so painful. When a paycheck doesn’t arrive, it can mean an employee misses rent or a car payment. For the owner, it signals something deeper: a break in trust and a sign that their business’s financial cushion is thin.

In this report, we use a large data set of anonymized payroll records and linked company bank account data from Gusto to show that the share of small businesses missing payroll has grown sharply since 2020—and that these episodes often reflect temporary but severe cash flow shortfalls. The good news is that most of these situations are solvable. With short-term financing, better cash flow management, or other low-touch interventions, many businesses could avoid the costly spiral that begins when they can’t make payroll. 

Small businesses are increasingly missing payroll

The quarterly share of small businesses that failed to process a payroll because of insufficient funds has risen 54% in the past six years, from about 1.5 percent in the first half of 2019 to about 2.3% in the first half of 2025. These “missed payrolls,” recorded when Automated Clearing House (ACH) transactions are denied for uncollected or insufficient funds, may seem rare, but they translate into tens of thousands of employers and workers: roughly 90,000 businesses missed payroll in each of the first two quarters of 2019, compared with 138,000 in 2025.

This increase occurred across every region of the country. Businesses in the Northeast and South saw the sharpest growth in missed payrolls, while those in the Midwest and West experienced smaller but still meaningful increases. The timing coincides with a period of unusually persistent inflation: consumer prices rose above 3 percent in April 2021 and stayed elevated until June 2024, peaking near 9 percent in June 2022. Even by late 2025, inflation remained near 3 percent, reflecting continued economic uncertainty and tariff pressures.

Beyond macroeconomic pressures, many small businesses face persistent cash flow volatility. Nearly one in four still experience irregular timing in accounts receivable and payable, volatile expenses, or sporadic revenue even after four years in operation. This isn’t just a challenge for new businesses establishing a customer base, it’s a feature of small business life. When expenses rise or payments arrive late, even healthy businesses can suddenly find themselves short on cash. The sharp increase in missed payrolls since 2019 reflects that reality: as small businesses faced higher costs and greater uncertainty, a growing share simply ran out of liquidity when it was time to pay their teams.

Missed payrolls affect nearly 3.4 million employees in 2024

Missed payrolls are not limited to any one type of small business. Between 2019 and 2024, the annual share of businesses missing a payroll increased across every size group. Larger small businesses have the highest overall rate, but the smallest firms saw the steepest rise. Businesses with two to five employees were 43 percent more likely to miss a payroll in 2024 than in 2019.

These very small employers may seem minor individually, but collectively they are central to the U.S. labor market. Private establishments with fewer than 50 employees employed more than 57 million people as of March 2025, accounting for about one-third of all private-sector workers nationwide. Applying the observed missed-payroll rates to total employment by establishment size, we estimate that roughly 3.4 million employees are directly affected by a missed payroll in 2024.

Applying missed-payroll rates to the total number of small businesses by size and to total employment by establishment size, we estimate that nearly 3.4 million workers are affected by missed payrolls in 2024. Compared with 2019, this represents an increase of almost 900,000 employees and 230,000 businesses experiencing at least one missed payroll in a year. Businesses with five to nine employees saw some of the largest proportional increases: they were 43 percent more likely to miss a payroll in 2025 than in 2019. The number of affected workers at businesses of this size rose by roughly 170,000, with about 32,000 additional owners navigating tight cash flows and difficult payroll decisions.

This surge in missed payrolls aligns with a period of sustained cost increases for small businesses. Between 2020 and 2024, owners faced overlapping pressures: pandemic disruptions, supply shortages, higher input costs, rising employee wages, and rapidly increasing interest rates. The Federal Reserve’s effective federal funds rate climbed from 0.08 percent in January 2022 to 5.33 percent in August 2024, an increase of more than five percentage points. For small firms relying on revolving credit or seeking new loans, the cost of borrowing multiplied many times over.

Higher financing costs were layered on top of already elevated inflation. By mid-2022, consumer prices were rising at their fastest pace since the 1980s. And while inflation eased somewhat by mid-2024, it remained above pre-pandemic levels through 2025, leaving many small businesses still squeezed between rising expenses and unpredictable customer demand.

Looking forward, the same forces could persist. Federal borrowing costs remain high, potentially keeping credit expensive for small firms. Tariffs on imported goods are contributing to renewed inflationary pressure: consumer prices rose from 2.33 percent in April 2025 to 3.02 percent by September. While our analysis is descriptive rather than causal, the data show that small businesses are highly sensitive to changes in prices and financing costs. If costs continue to rise, more small firms may struggle to make payroll on time, even when the broader economy appears healthy.

Increases in missed payrolls have been widespread across industries

Almost every industry experienced a significant increase in the share of businesses missing a payroll in 2024 compared to 2019. This pattern suggests that the cash-flow strain linked to high inflation and rising costs reached small businesses across nearly every sector of the economy.

Industries most exposed to input-cost fluctuations, including wholesale trade and hospitality, saw some of the sharpest growth in missed payrolls. Construction businesses also experienced large increases in NSF rates, with their share rising by about 30 percent between 2019 and 2024. As the economy reopened, many workers in this sector were able to command higher wages and benefits, which further stretched already-thin operating margins. Rising labor costs correspond closely with the higher incidence of missed payrolls during this period.

Bank balance data suggest that missing payroll is due to temporary shortfalls in cash

Bank account data linked to payroll records provide a real-time view of how small businesses manage liquidity when funds run tight. In a sample of more than 100,000 businesses with connected bank accounts, we find that most shortfalls at payroll time are temporary rather than chronic. The median business that is short on payroll maintains bank balances that exceed 150 percent of their payroll costs, but at the moment of a shortfall those balances can cover only about 40 percent of payroll.

For this analysis, a business is considered short on payroll when its total gross payroll exceeds the balance available in its linked account. The sample is limited to the period between May 2023 and September 2025, reflecting the span of available bank-balance data.

Not all businesses that experience these shortfalls miss payroll outright. Understanding this broader group is important for gauging cash-flow strain. In Gusto’s 2025 State of Small Business Survey, 38 percent of small businesses that used external financing reported doing so to cover payroll expenses. Even when owners ultimately pay their staff on time, more than a third must find additional funds to do it.

Nine percent of small businesses have tight payrolls each month

About 9 percent of small businesses each month in 2025 had at least one payroll where their payroll costs temporarily exceeded the balance in their linked bank account. These are not the same businesses each month, which means shortfalls are relatively rare for any individual firm but common in the aggregate.

Over a longer period, nearly one-third of all small businesses experienced at least one payroll where total payroll costs exceeded the current balance available. Even if many ultimately covered the gap, the fact that they needed to do so underscores how tightly many small businesses manage cash. The data confirm that these businesses regularly operate near the edge of their available cash on hand.

Industries with lumpy revenue or inconsistent cash flows are more likely to have businesses short on payroll

Industries with tight or uneven cash flows, such as restaurants and hospitality, are among the most likely to experience at least one payroll where available balances fall short of total payroll costs. Other industries, including construction, manufacturing, and logistics, often perform work before receiving full payment. In many contracts, only a portion is paid upfront, leaving employers responsible for meeting regular payroll obligations before the remainder of the contract is paid.

These timing mismatches create temporary shortfalls in cash and increase the likelihood that a business’s account balance will be insufficient to cover payroll.

The typical business ever short on payroll has about one-quarter the balance of those that are never short

We separate small businesses into two groups: those that are never short on payroll and those that are short at least once. The first group includes firms where every observed payroll was covered by available balances. The second includes firms that had at least one payroll where gross payroll costs exceeded their current balance. About two-thirds of small businesses never experience a shortfall, while one-third do at least once, though not consistently. This pattern aligns with survey findings showing that 38 percent of small businesses using external financing do so to cover payroll shortfalls.

Both groups have similar payroll needs. The typical payroll for a company that is never short is about $4,100, compared with $3,600 for those that are ever short. Despite similar size and payroll costs, their balance positions differ sharply. For firms that are never short, payroll typically represents about 10 percent of their total balance. For those that are ever short, payroll represents more than one-quarter of available funds.

Every business faces a range of operating expenses beyond payroll. When expenses rise temporarily or payments are delayed, businesses with thinner balances have less capacity to absorb the fluctuation. Even modest increases in costs can push them into a temporary shortfall. These thinner reserves also leave some businesses with far less time to react, a gap that becomes clear when comparing how many days of payroll each can cover with its available balance.

Lower balances mean a shorter payroll runway

Smaller cash balances translate directly into shorter payroll runways. Businesses that have ever been short on payroll hold, on average, enough in their accounts to cover about 30 days of payroll. In contrast, businesses that are never short can cover roughly 120 days.

Payroll runway is calculated by dividing each company’s current balance by its typical payroll amount and converting that ratio into days based on its payroll frequency.

This measure reflects only payroll obligations, not other recurring expenses such as rent, utilities, or input costs. As a result, firms with lower balances, the one-third that are short on payroll at least once, face compounding pressure. Low reserves limit their ability to meet payroll and other obligations simultaneously, tightening their liquidity when expenses rise or revenue slows.

While payroll runways have remained largely flat for businesses that experience shortfalls, they have lengthened for those that never do. Businesses that can consistently cover payroll increased their median runway from 113 days in June 2023 to 132 days in September 2025, a gain of nearly three weeks. For firms that are ever short, runways were nearly unchanged, from 34 days to 33 days over the same period. The widening gap suggests that liquidity among stronger businesses has improved, while others remain exposed to shocks and forced to react faster when cash gets tight.

Missing payroll leads to lasting employment declines

Nearly one-third of small businesses experience temporary shortfalls where their bank balances cannot fully cover payroll. Most manage to bridge those gaps. The firms examined here are the ones that could not. A missed payroll is defined as an ACH transaction returned for insufficient funds (NSF), meaning the payroll was initiated but failed to process because the account lacked the necessary balance.

To estimate the impact of missing payroll, we use an event-study framework that exploits the fact that different companies experience their first missed payroll at different times. This approach compares the path of employment for firms after their first missed payroll with the path of similar firms that have not yet, or never, missed payroll. Because all firms face the same external environment, seasonal patterns; interest-rate shifts; and other macro shocks, any systematic divergence after the NSF event reflects the consequences of the missed payroll itself rather than broader economic trends.

We follow each company quarter by quarter before and after its first NSF, treating firms that are later-treated or untreated as the control group. This design isolates changes in employment attributable to missing payroll while holding constant time-specific shocks that affect all small businesses.

The figure below plots average employment changes for small businesses before and after their first missed payroll, compared with the quarter immediately preceding the missed payroll. Each point shows the percentage difference in employment from that quarter, and the shaded band represents the 95 percent confidence interval. When the shaded band crosses the zero line, it means we cannot statistically distinguish that point from no change relative to the prior quarter. Before the missed payroll, the interval consistently includes zero, indicating stable employment. Afterward, it does not: the decline is both sharp and statistically meaningful. Within two quarters, the average firm’s headcount is about 8 to 10 percent lower than the quarter before the miss, and it shows no recovery in the following two years. The pattern suggests that a missed payroll marks a clear break in a small business’s trajectory rather than a temporary setback.

Within two quarters of missing their first payroll, the average small business employs about 8 percent fewer workers than in the quarter before the missed payroll. The decline deepens to roughly 9 to 10 percent and shows no recovery even after eight quarters. Small businesses that miss payroll rarely return to their prior employment levels.

A decline of this magnitude raises important questions about what drives it. Several explanations could account for the pattern. One is that owners deliberately reduce headcount after missing payroll to avoid repeating the experience. Another is that employees leave on their own after missing a paycheck. A third is that the business expanded too quickly before the event and the decline represents a natural correction. Each of these is plausible, and the data allow us to examine them directly.

If employees were leaving voluntarily because of missed paychecks, employment would likely rebound as owners hired replacements, but the data show no such recovery. The persistent decline indicates that separations are not being offset by new hires, suggesting that the reduction reflects the owner’s decision rather than voluntary turnover. Similarly, if firms had overexpanded before the NSF, we would expect to see rising employment leading up to the event and a peak just before the decline. Instead, employment levels from eight to one quarters before the NSF are statistically indistinguishable from the pre-event quarter. There is no evidence of rapid pre-miss expansion.

Taken together, the evidence supports the interpretation that owners respond to short-term liquidity shocks with lasting reductions in staff. Missing payroll is a moment of acute stress and a public signal that cash reserves are thin. Even when the underlying financial problem is temporary, owners appear to react by scaling back employment in ways that persist long after the liquidity issue is resolved. Policies or products that help small businesses manage temporary cash-flow gaps—through faster access to credit or liquidity—could reduce the risk of these long-term employment losses.

Medium and large small businesses are more likely to have sustained headcount reductions

The size-split analysis points to more persistent declines among larger small businesses, while the smallest firms show weaker and less durable effects. This reading is directional, not definitive, because precision falls as we cut the sample by size.  

For firms with more employees, employment remains below the pre-miss level well after the quarter with a missed payroll. The pattern is consistent with a lasting contraction rather than a temporary adjustment.  

For the smallest employers (fewer than five employees), the picture is different. These firms show some growth in the run-up to the missed payroll and then a decline that appears to recover within about a year, leaving employment statistically indistinguishable from the pre-miss quarter. Two practical considerations matter here. First, the estimated change, about six percent, is not meaningful in discrete terms, since a business with five or fewer employees cannot lose a fraction of a worker. The result reflects model-based smoothing, not an actual fractional reduction in staff. Second, estimates in this group are noisy because the number of observations is smaller, so results should be read as suggestive rather than conclusive.

Overall, the size breakdown reinforces the main result: missing a payroll is followed by sustained employment losses for many small businesses, with the clearest persistence among firms with more workers. For micro-employers, effects are harder to pin down and likely small in practical terms.

Conclusion 

Small businesses operate on thin margins, and payroll is often where those limits show first. Using transaction-level and balance-sheet data, this analysis shows that the share of small businesses missing payroll has grown substantially since 2019, that many more come close to doing so each month, and that a missed payroll can mark a lasting break in a business’s trajectory.

Most shortfalls are temporary and reflect momentary liquidity gaps rather than structural weakness. Yet for the firms that do miss payroll, the consequences are persistent. Employment falls by nearly ten percent and does not recover, even two years later. These effects appear to stem from owner decisions to cut costs after a liquidity shock, not from preexisting decline or voluntary employee exits.

The evidence also shows widening differences across businesses. Firms with steady cash reserves have lengthened their payroll runways, while those that have ever been short remain stuck with only a month of payroll on hand. The result is a growing divide between businesses that can absorb a temporary shock and those that cannot.

These findings highlight both the fragility and the resilience of small businesses. They suggest that interventions which help firms smooth cash flow—through faster access to credit, flexible financing, or more predictable payment systems—could prevent temporary liquidity gaps from becoming long-term employment losses. Missed payrolls are not just accounting events; they are early warning signals of financial strain that can ripple through workers and local economies. Understanding and addressing them is essential to strengthening small-business stability and, by extension, the health of the broader labor market.

Methodology

This report draws on administrative payroll and banking data from Gusto, a payroll platform serving more than 400,000 small businesses across the United States. The analyses were designed to measure how often small businesses are unable to make payroll, what financial conditions precede those events, and what happens to employment afterward. The analyses combine three complementary approaches designed to capture how cash-flow constraints affect small-business payrolls and employment.

Measuring Missed Payrolls (NSF Incidence)

A missed payroll is defined as an Automated Clearing House (ACH) transaction returned for insufficient or uncollected funds (return codes R01 and R09). Missed-payroll rates are calculated using a stratified random sample of small businesses, weighted to reflect the national distribution of firms with fewer than 50 employees by industry, size, and region.

Assessing Liquidity at Payroll Time

To understand short-term cash-flow pressures, we analyze bank-balance data for more than 100,000 businesses that linked a business bank account to their payroll system. For each payroll run, we observe the available balance, gross payroll amount, and fund sufficiency at the time payroll was processed. These data capture both full NSF events and near-miss situations when balances fell below payroll amounts but businesses still found a way to pay. The period analyzed spans May 2023 through September 2025.

Estimating Employment Impacts

We estimate the employment effects of missing payroll using an event-study difference-in-differences design following Callaway and Sant’Anna (2021). This approach compares changes in employment for firms before and after their first NSF to changes for firms that have not yet, or never, experienced one. The analysis covers more than 200,000 small businesses observed from 2019 through 2025.

Employment is tracked for eight quarters before and after each firm’s first NSF event. Results show no pre-trend differences between treated and control firms, supporting the study’s identification assumptions. Employment outcomes are measured as percentage changes relative to the quarter before the missed payroll (using standard log-difference methods).

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 ^{NSF incidence calculated from a random sample of small businesses set to resemble U.S. small businesses with fewer than 50 employees based on industry, employee size, and geographic region. See methodology section for full sampling procedure.}

^{This analysis assumes that the average size of small businesses across the size distribution (i.e., 1-4 employees; 5-9 employees; 10-19 employees; and 20-49 employees) remained unchanged between 2019 and 2025. This estimate was calculated by finding the average number of employees for each business size by dividing the total number of businesses in each size distribution as of December 31, 2024 per the NAICS association by the total number of employees in each establishment size per the U.S. Bureau of Labor Statistics, while firms and establishments aren’t always directly comparable we assume that very small businesses likely only have one establishment. Finally, we apply the incidence of missing a payroll for each size group calculated from Gusto’s stratified random sample to calculate the number of affected businesses and then multiply the number of affected businesses by the average number of employees for each business size.}

 ^{Payrolls longer than 35 days are treated as distinct sequences to avoid overstating the runway during periods of irregular or suspended operations.}

 ^{This approach, based on Callaway and Sant’Anna (2021), accounts for the fact that treatment effects may evolve over time and that different cohorts may be affected differently. Standard errors are calculated using methods that account for the fact that we observe the same companies repeatedly over time.}