FTE For Small Businesses: Why It Matters and How to Calculate It

An FTE (full-time equivalent) count is a vital metric for any employer who wants to keep their business compliant and determine whether or not they’re obligated to offer health benefits. While that may sound like human resources lingo that only applies to large organizations, it’s not the case — it applies to your small business, too, and it’s important to get it right. 

But the good news? Calculating your FTE is fairly straightforward, and once you get the hang of it, you’ll find that it can make small business budgeting and resource allocation much easier. It can even help you qualify for certain tax credits and small business health programs. 

That’s why we’re here to clarify what FTE is and how it works for small businesses in the simplest way possible. We’ll also show you how to calculate it step-by-step with concrete, easy-to-understand examples.

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What is FTE (full-time equivalent)?

A full-time equivalent (FTE) measures the number of hours an employee works in relation to a full-time position. It’s important to know that the Internal Revenue Service (IRS) considers any employee who works an average of 30 hours per week or 130 hours per month full-time.

It’s important to note that FTEs aren’t the amount of full-time employees you have, although it may seem that way. Rather, your FTE count shows you how much every team member works based on a full-time schedule. You'll still have an FTE count even if you employ all or mostly part-time employees. 

You can calculate FTEs based on the average number of hours team members work per week. The FTE formula looks like this:

FTE = The number of hours your employee worked/Standard full-time hours in your organization

As a basic example, let’s say that one of your small business team members works 30 hours per week. You’d calculate it like this:

• FTE = 30/30

FTE = 1

An FTE of 1 shows us that the employee in question is working 100% of a full-time schedule. Your full-time employees will always get an FTE of 1 when you calculate it based on IRS guidelines.

How does FTE work with part-time employees? 

You can calculate FTE for part-time staff the same way you do for full-time staff. So, for instance, let’s say that you have a team member who only works 15 hours per week:

• FTE = 15/30

FTE = 0.5

The FTE for this employee is 0.5. Looking at it another way, they work 50% of a full-time schedule.

Why do small businesses need to calculate FTE?

The main reason — but not the only reason —  that small business owners need to calculate their FTE is to determine the kind of health benefits they can offer. 

Under the Affordable Care Act (ACA), employers are obligated to offer their employees group health insurance if they had a total of 50 FTEs in the previous year. So, even if they have a mixture of part-time and full-time workers, they still have to offer this kind of coverage to stay compliant with the ACA. 

Still, there are a few other reasons why it’s a good idea to stay on top of FTE count:

• The ACA’s Small Business Health Options Program — If you have fewer than 50 FTEs, your business might be eligible for special insurance coverage through this program. 
• Specific tax credits — For example, according to the IRS, a business with fewer than 25 FTEs qualifies for the small business health care tax credit as long as it also:
  • Pays less than $56,000 in average wages per year for each FTE employee.
  • Offers a qualified health plan through the Small Business Health Options Program Marketplace.
  • Covers at least 50% of the employee-only option for each employee.
• Compliance with labor laws — There are certain federal regulations that apply to businesses of particular sizes, like the Americans with Disabilities Act, which prohibits employers from discriminating against employees with disabilities at any time of their employment.
• Staffing and labor costs — Your FTE count can give you a more accurate assessment of current staffing gaps so you can hire new team members and allocate resources more effectively.

Pro tip: If you want answers to all your FTE-related questions, you can contact a live HR expert with Homebase HR Pro tool. They’ll be happy to answer them, as well as queries about taxes, regulations, and labor laws. They can even review your current policies and procedures. 

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How do you calculate FTE?

It’s possible to calculate FTE count manually with a few simple steps and tools like paper and a pencil or an Excel spreadsheet. Let’s break down how to do just that.

1. List all employees and how many hours they each work

If you’re unsure which of your team members count as employees for the purposes of this calculation, we’re talking about any of your workers — even friends and family — that receive W-2s. Freelancers and contractors don’t count, nor do you as a business owner, unless you’re paying yourself wages and receive a W-2.

First, write down how many hours each of your employees works per week on average, not taking overtime or breaks into account.

Here’s how that might look:

Staff memberTotal hours worked per weekAbby40Taylor35Tom21Malik15Eileen25

You can save a lot of time and simplify this step using Homebase’s free time tracking and timesheet tools, which automatically update employee hours as soon as team members track their time within the Homebase mobile app. Plus, you’ll feel confident in knowing that your hourly totals are always accurate.

2. Identify your number of full-time and part-time employees

Remember that the IRS defines any employee who works 30 hours per week or more as full-time. So, if you’re determining FTE for compliance and healthcare eligibility purposes, keep that in mind for your calculations. 

Let’s use the same example from before:

Staff memberTotal hours worked per weekFull-time or part-time?Abby40Full-timeTaylor35Full-timeTom21Part-timeMalik15Part-timeEileen25Part-time

Note: If your business considers 40 hours per week full-time, you can make a separate FTE calculation with that in mind. While you won’t use that FTE count to figure out if you’re obliged to offer group health insurance, it may help you with budgeting, labor costing, and hiring.

3. Calculate your FTE

First, you’ll add the part-time workers’ Tom, Malik, and Eileen’s total hours together. Then, divide by 30:

• 21 + 15 + 25 = 61
• 61/30 = 2.03

You’ll round this figure down to the nearest whole number. Now, you know the FTE count for your part-time employees, which is 2. 

Now, you’ll add this total to your number of full-time employees, which is also 2.

So, within the framework of this example, your full FTE count would be 4. In this case, you’re not required to offer group health insurance according to the ACA, but you may still be eligible for specific tax credits for small businesses.

A real-life FTE example

Let’s say that you run a gourmet market that has a full-time staff of 15 full-time employees and 40 part-time employees. 

Your part-time employees work about 20 hours a week keeping your shelves stocked, working as cashiers, and keeping your store clean. Your full-time employees run specific departments, work with suppliers, manage the part-time staff, and report sales numbers to the owner.

You add up your part-time employees' weekly hours and come up with a total of 345 because some of them work over 20.

• 345/30 = 11.5 (rounded up to 12)

Then, add that to your number of full-time employees.

• 12 + 15 = 27

Your FTE count is 27.

But what does it look like if your staff fluctuates throughout the year because you sometimes rely on seasonal workers? 

If your seasonal staff members work 120 days or fewer during the taxable year, they don’t count as FTEs, according to the IRS.

Homebase makes it easy to stay compliant

Now that you’ve seen what calculating FTE looks like in action and can apply it to your own small business, you likely realize that it’s not as intimidating as it seems. That’s great news for you, because once you grow more confident in determining your FTE count for compliance and tax purposes, you’ll find it much easier to apply it to your budgeting and staffing practices. 

We’ve also shown you that it’s completely possible to calculate FTE on your own. However, without help from software, you should double and even triple-check your math or seek out another pair of eyes to ensure everything’s accurate. 

That’s why we recommend using a small business management platform like Homebase to make the entire process easier. Our free scheduling, time tracking, and timesheet tools work together to ensure that your employee hours are always updated and accurate, and even account for breaks, overtime, and PTO. 

And when you upgrade to include HR Pro in your plan, you’ll get access to a team of HR experts who can answer any questions you have about employment law, taxes, and state and federal regulations. All in all, you’ll never have to feel like you’re going it alone again.

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