The SMB Readiness Report: What Are the Biggest HR Costs for Small Businesses?

Most small and mid-sized business owners already know HR costs are a challenge. But if your cost concerns are focused primarily on wages and benefits, data from the G&A Partners 2026 SMB Readiness Report suggests there's a bigger picture worth looking at.

In this article, we take a closer look at what's driving HR cost pressure for small business owners. Compliance costs and regulatory complexity are shaping workforce decisions just as significantly as pay, a more complicated insight than “benefits are expensive,” and an important indicator for how you might plan, hire, and manage your team going forward.

Layered Challenges

HR compliance costs and regulatory complexity are driving workforce decisions just as much as pay itself. So if you're feeling like the cost of running your workforce has increased without a clear explanation, the data suggests you're not imagining it:

• 51% of SMB owners say compliance costs have increased
• 41% say regulations have directly changed how they hire, classify workers, or manage HR practices
• 39% say compliance responsibilities are taking time away from business-critical activities
• 34% have invested in software, consultants, or outside support just to manage compliance demands, not to grow or innovate, but simply to stay current

The drivers are layered, and they're compounding on top of each other in ways that make HR budgeting increasingly difficult to predict.

Start with the One Big Beautiful Bill Act (OBBBA). 68% of SMB owners say the legislation has increased their operating costs, and 61% have already responded by raising prices, cutting expenses, or delaying investments. Then add tariff uncertainty. Prices on imported goods and materials are shifting rapidly, leaving many small business owners absorbing cost increases they didn't see coming and can't always pass on to customers.

Notably, the line between what's driven by OBBBA legislation and what's driven by tariffs can be blurry, but for many small business owners, it's felt the same way: pressure on the bottom line.

What are the biggest HR costs facing small businesses?

The HR expenses that are hardest to predict often arrive without warning when regulations shift, classification rules change, or an audit surfaces something you didn't see coming. Once you know where these pressures tend to build, you can plan for them instead of being caught off guard.

For many SMB owners, the first challenge is hiring, especially because the true cost of hiring employees goes well beyond a salary offer. The report revealed that:

• 77% of SMBs are delaying or stopping new hires — knowing every full-time employee comes with a growing list of compliance obligations
• 39% have shifted toward contractors instead of full-time employees to manage that exposure
• 26% are investing in automation in place of new hires altogether

When the pressure gets severe enough, the strategy can change. Half of SMBs have eliminated or reduced benefits or perks, typically only after other cost-cutting options have been exhausted. Cutting health insurance can also lead to exit conversations with your best people.

The same goes for frozen raises and eliminated bonuses. With prices rising across the board, asking employees to absorb a compensation freeze is a significant ask. The retention risk that follows is a labor cost for small businesses that might not show up on a compliance invoice, but it hits just as hard.

And when there's nothing left to cut, 30% of owners have gone without a salary themselves to keep the lights on — another last-resort tactic.

What HR investments are SMBs prioritizing?

Despite the pullback on hiring and the cuts to compensation and benefits, SMB owners aren't abandoning their people strategies entirely. 41% plan to increase investments in benefits and healthcare coverage over the next year. Even in a constrained environment, competitive benefits remain one of the most important tools for attracting and retaining talent.

Cutting benefits as a survival measure while simultaneously planning to invest more in them as a retention strategy reflects the difficult position many SMB owners are in right now. With that, many owners are asking how exactly their small business should budget for employee benefits. Treating benefits as a strategic investment to manage, rather than fixed cost to minimize, can pay off. The cost of losing a key employee often exceeds the cost of keeping them covered.

Help Managing What You Can't Predict

Our 2026 SMB Readiness Report affirms that the administrative and compliance burden of running a workforce is consuming time, energy, and resources that small business owners need elsewhere. The last thing you need in an uncertain environment is to be focused on administering payroll, managing benefits, or navigating HR compliance over client retention and the decisions that move your business forward.

That's where a professional employer organization (PEO) like G&A Partners steps in. By taking on the administrative and compliance functions that are driving so much of your HR cost pressure, G&A gives you back the time and focus to run your business.

Think of it this way: The cost of a PEO relationship is often comparable to the cost of one full-time employee, but what you get in return is a fully managed HR infrastructure, enterprise-level benefits, and the peace of mind that comes with knowing the compliance piece is handled.