As a small-business owner, Barry Dorrity knows he has to watch every penny closely. That’s one of the reasons the operator of the Genesis Mold tool and die shop in San Diego keeps his overhead low with a small staff.

Currently, only Dorrity and his son are employed at the machine shop. "If you’re a small business, you have to do that," Dorrity explains. "You have to learn to cut corners or you’ll go out of business. I can’t really afford to have employees."

The cost of employee benefits and the wherewithal to offer them are sizable problems for all small businesses, according to a survey by the Small Business Administration.

Hindrance to Hiring

The survey reveals that small businesses find themselves at a competitive disadvantage with larger companies that can offer broader benefits packages for less cost per employee.

And because economists continue to predict a growing shortage of workers, the disadvantage is sure to grow more important for small businesses.

"Small businesses compete for the same labor pool that large and medium-sized businesses compete for," notes Michael Shaw, assistant state director of the National Federation of Independent Businesses, a lobbying group for small business.

"More than two-thirds of all jobs are created by small business. It’s not a healthy situation when they can’t afford to offer the benefits needed to compete."

The SBA study found that American businesses paid an average of $7.40 per hour in benefits to their employees, equivalent to about 29 percent of their compensation costs. Another finding confirmed that access to benefits such as health insurance, sick pay, vacation pay and pensions is more restricted at small businesses.

"There are signs that access to some of these benefits is declining," the SBA report warned. "While there is little evidence that the share of workers with access to paid-leave benefits has changed significantly, health insurance is not as available as it was prior to the 2001 recession."

Healthcare Coverage Declining Across the Board

In 1999, 67.9 percent of workers in private organizations with more than a thousand employees had access to health insurance, compared with 54.2 percent for companies that employed 25 to 99 workers, and 32.9 percent for companies with fewer than ten workers, according to the SBA.

Three years later, the percentage of workers in large companies with access was down to 64.3 percent, while companies that employed 25 to 99 workers dropped to 50.4 percent, and companies with fewer than ten workers covered 31.5 percent.

"Every four years, we survey our members about benefits," the NFIB’s Shaw reports. "For 20 years, the cost of healthcare benefits has been at the top of the list of their concerns. More importantly, it’s becoming increasingly important to them."

Small companies also wrestle with the cost of retirement plans. Shaw says that as a worker builds skills and gains experience, he or she comes to expect some sort of pension.

But few companies can offer defined-benefit plans, which pay workers a fixed monthly amount upon retirement. So when small businesses do offer pension plans, they are usually defined-contribution plans, or 401k plans that provide some percentage of matching funds if workers set aside their own money in the plan.

Not only does this typically cost small employers more, it also requires that the individual workers manage their own investments.

"The nice thing about a 401k or something like that is that it is portable," Shaw said. "But it is costly and requires more effort on the part of the worker."

The benefits dilemma is vexing for all employers. They need to find the right mix of benefits to attract and retain the workers they need, but no one wants to overspend.

Still, business owner Dorrity says, the smallest companies struggle to provide even a basic benefit such as health insurance. "Guys I know who have offered benefits to their workers for years are starting to find out that they just can’t afford them anymore."