If you want to run a business amongst the top skills you need to master, you better include acronyms and math. How else are you going to know how to calculate 0.5 FTE? Or 75% of a workweek that lasts 37.5 hours? And what is PPP? And ACA? Your head must be hurting, but don’t worry, because in this article you will find answers to all of your questions.
Let us begin by saying why is all of this so important. Managing a business can be a very stressful occupation, and there are certainly many things you will forget, or make a mistake with. Some you won’t ever understand, so you will outsource. And that is not only acceptable, but it is also absolutely necessary. However, the information regarding IRS regulations and rules concerning the FTE is something that you should definitely learn and understand. This knowledge isn’t so hard to acquire, but it is very valuable. So, let’s start with the most important question and acronym.
What is an FTE employee?
FTE stands for full-time equivalent. Your FTE employee is someone who works the entire workweek, and his total working amount to 2,800 hours per year, breaking down to 5 days a week, 8 hours per day. A typical 40h workweek is a term you are surely familiar with. Although in some cases, employees consider 37,5 hours a full-time work week, because they don’t include the 30 min mandatory daily break in the total amount.
FTE can also be called WTE - whole time equivalent.
However, not all employees work full time. Some are part-time workers, others only work during certain months of the year, and others have flexible schedules. And this is precisely why this metric has been introduced. FTE is a unit of measure that helps you count the hours worked by all types of workers, and it is also used to reverse-engineer how many people you should hire when you plan a project or a campaign.
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What is the purpose of FTE?
Let’s say that you need to calculate the total amount of hours, time, and money required for your business to run successfully. FTE will help you do this. It also enables you to do the math backward. If a project requires, let’s say 600 hours, and you only want to hire full-time employees that mean that you will need 15 weeks for one person to finish it, or 7,5 if two people are doing it, etc… You can use this metric to make predictions for project management, thus making sure you have all the resources you need and you will be able to meet all of the deadlines required of you. Human resources are often using this metric in order to make the staffing decision for the entire company.
In addition to this, several federal programs use FTE to see if you are eligible for their programs since the actual headcount doesn’t really matter that much. Amongst these programs are the Paycheck Protection Program (Remember the PPP from the intro?), which can be very important for your business. FTE is also important to count whether an employer is an ALE - applicable large employer for the fiscal year. And small business owners need this metric to see if they can apply for a tax credit in the amount of 50% of the employer-paid health care premiums.
What is applicable large employer (ALE)?
FTE calculation is very important for ALE. If you had 50 or more FTEs - meaning 50 full-time working hours being completed, regardless if you had 50 or 200 workers on your payroll, that means that you fit the ALE bill. Like you can see here, the number of employees is irrelevant, only the number of full-time-equivalent employees counts. You are considered an applicable large employer for the fiscal year.
That means that you are required to offer group health insurance. This is covered by the Affordable Care Act. Besides, this means that you have to send in 1094-C and 1095-C forms to the IRS. They are used to describe the kind of coverage you are providing to your employees.
What does FTE 100% mean?
An FTE 100% is a full-time employee, the one working 40h workweeks. That is a standard measure that you are using to calculate the time, money, or employees required to finish a project. Like we mentioned, some employees count 37.5 to be the standard workweek, which is the number of hours actually worked when you exclude the breaks.
Sometimes one person can be your FTE 100%, or FTE 1.0, which is another way to call it. In other cases, more people will be required to fill this quota - two part-timers, four employees that only work 10h a week, etc.
You can create various combinations, depending on the needs of your business. If, for example, you run an ice cream van that only works 5h during the day, and it works 4 days a week, and you only have one van, you will only require 0.5 FTE. But, if the truck increases its opening hours and it starts working every day of the week, then you have 0.875 FTE. And if you hire two trucks, then you have a 1.75 FTE. If the trucks are open at the same time then you require two different people to run them, but if not you can have one person working overtime.
What is a 0.5 FTE?
Based on the previous calculations you can see that there are many options, combinations, and alternatives. 1.0 FTE is just a measurement unit and not a fixed choice. Depending on the needs of your business you can have as many options as you would like.
0.5 FTE is the number of hours required for a part-timer, someone working half the amount of a full-timer. According to the standard, that is 20 hours per week. You can have one or several people fulfilling this norm.
0.5 FTE is typically used for positions such as project managers, supervisors, overheads, and strategists, where it isn’t necessary to be present (and paid for!) for the entirety of the workweek, but the job can be done in fewer hours and with a flexible schedule.
How can you calculate FTE?
Calculating your FTE is not as difficult as it seems. You just need to add the total amount of hours worked by all of your employees and divide it by 40h. The number you get needs to get rounded up to two decimals.
Let’s say you have two hires working 40h a week. That amounts to 80h a week. Also, you have three part-timers, each working 20h per week. And finally, you have three people with flexible schedules, and the average number of hours they work is 15. That means that you have 8 employees, totaling to 170 hours per week. When you divide the number of hours with the average FTE hours, which is 40, you get a total of 4,25. For all intents and purposes, your business is requiring 4,25 employees to function.
Are there any exceptions to calculating FTEs?
Absolutely. FTEs are calculated differently for different purposes. The 40h workweek is applicable if you are doing the math for accounting and business purposes. However, if you are considering whether or not you are an ALE, you should consider the IRS’s minimum of a 30h work week. Luckily, the IRS taxpayer advocate service has created something to help you - Employer Shared Responsibility Provision (ESRP) Estimator.
There are two other exceptions as well. One is related to the Small Businesses Tax Credit. This credit helps cover the costs of health benefits for employees, and you can be eligible only if you have less than 25 FTEs. The calculations are a bit different. First, you need to count the total number of the employees, regardless of how many hours they worked. Bear in mind that certain employees don’t count - owners, partners, shareholders, family members, and seasonal workers that worked less than 120 days per year. There are three methods for calculating FTEs for this purpose.
- The first one is to calculate actual hours worked - plus vacations, holidays, and illness.
- Another is to calculate days-worked equivalency (considering 8h a workday), or a weeks-worked equivalency (40h per week). It is allowed to use any of these classifications, but you need to stick to the one you choose. The total number of hours needs to be divided by 2080, and that ultimately determines the number of FTEs. Since this calculation is pretty complex, you can rely on the Full-time Equivalent (FTE) Employee Calculator from Healthcare.gov.
- And the last exception is for the PPP - Paycheck Protection program. It is an SBA program (small business administration) that helps preserve a business in times of crisis. The total FTEs number is used to calculate the loan the borrowers are eligible to get. Borrowers can use the average number of FTEs per month from two different time periods. Either from February 15th, 2019 to June 30th, 2019, or they can choose the January 1st, 2020 to February 29, 2020. They can also use their own definition of full and part-time employees.
Is there anything else I need to know?
One of the most common FAQs is what is the minimum of hours required for someone to be considered a full-time worker. Although most businesses consider 40h a week and 160h per month full-time employment, according to the IRS, only 30h weekly and 130h per month are enough. That means that someone working 31 hours a week is a full-time hours employee.
In some cases, based on the company policy, a 0.75 FTE (30 hours per week) can be considered a full-time position, which means that such workers are eligible for the PSFL program - Public Service Loan Forgiveness.