What is an FTE and How Do I Calculate Employee FTEs?
The term FTE or Full-time Equivalent is used in many contexts in employment situations.
It is sometimes useful to know how many full-time and part-time employees are working in a business. But some part-time employees work different hours, and they must be included in the calculation of the number of full-time employees. For the purposes we are discussing here, 40 hours is usually considered full time, and one FTE is equal to one full-time employee.
An Example of How FTE's are Used
Let's say you have three employees. One works 40 hours a week, the other works 35 hours a week, and the third works 30 hours a week. You need to do a calculation to determine how many FTE's you have.
The simplest calculation is to add up the total hours worked by all three employees and divide that total by 40. The total of 105 hours divided by 40 is 2.63. You have 2.63 full-time equivalent employees.
FTE's in the Health Care Reform Law
In the context of the Affordable Care Act (Obamacare), FTE's are calculated in a specific way. This calculation of the number of an employer’s FTEs is used for determining whether an employer is an Applicable Large Employer, for several purposes:
Employer Shared Responsibility provisions. This section of the health care law requires that larger employers with over 50 full-time equivalent employees, offer affordable health care, or be subject to penalties, and
Employer information reporting provisions for offers of minimum essential coverage.
Small-employer health care tax credit provisions allow smaller employers (those with fewer than 50 FTE's) the opportunity to apply for a tax credit of 50% of employer-paid health care premiums.
How to Calculate Full-Time Equivalents (FTEs)
First, count the total number of employees who worked at your company at any time during the year, both full-time and part-time.
Don't count yourself as the owner, or your spouse or your children. Don't count any family members (that means don't include:
grandchild, sibling or step-sibling, parent or ancestor of a parent, a step-parent, niece or nephew, aunt or uncle, son-in-law or daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
And don't count spouses of any of these people. In other words, if anyone is related to you by marriage or birth or in any other way, don't count this person as an employee.
Finally, don't count seasonal workers unless they work more than 120 days during a year.
How the IRS wants you to calculate FTE's for this purpose. The calculation is done by month.
- Determine the number of hours worked by each employee during the year. Include hours for which the employee is paid for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Divide these total hours by 12 to get a number of hours a month.
- Combine the number of hours of service of all non-full-time employees for the month, but do not include more than 120 hours of service per employee, and
- Divide the total by 120.
The 120 hours comes from the IRS assumption that 30 hours of service a week is full time, and there are usually 4 weeks in a month.
As an example, if you have three non-full-time employees, one with 100 hours a month, one with 80 a month, and one with 50 a month, that's 230 hours divided by 120, for a total of 1.75 FTE's.
The number of full-time equivalents for non-full-time employees is added to the number of full-time employees (as described below) to get the actual number of FTE's for the purposes described above.
Identifying Full-Time Employees
For purposes of the employer shared responsibility provisions, the IRS says that a full-time employee is, for a calendar month, an employee employed on average at least 30 hours of service per week, or 130 hours of service per month.
Two methods are used in this calculation, which is explained in more detail in this IRS article on Identifying Full-time Employees.