Key Takeaways
1. Full-time equivalent (FTE) is a unit of measurement that calculates the number of full-time and part-time employees there are in an organization and is an important metric that can help businesses manage projects and schedule tasks more efficiently.
2. An explanation of how FTE is calculated and the various ways in which a business can use this metric when forecasting and budgeting.
3. The number of full-time employees there are in an organization will determine whether the employer is subject to the employer shared responsibility provisions under the Affordable Care Act with regards to health care coverage for their employees.
4. FTE calculations are also important when determining eligibility for certain federal programs and benefits.
Any business in the United States needs to be able to identify how many full-time employees they employ in order to effectively plan their workforce, comply with specific laws and assess their eligibility for various federal benefits and programs.
This is particularly true for large organizations that employ a variety of full-time, part-time, and flexible staff. Being able to convert the number of hours worked by their employees into a useful metric can help such organizations determine their workload, realize how to allocate their resources better, and successfully accomplish their projects on time.
In this article, we will explore the meaning of FTE from a U.S. perspective, how it is calculated and the purposes of doing so as an employer.
What is the meaning of FTE?
FTE stands for full-time equivalent and measures how many full-time employees an organization has. FTE can also be called whole time equivalent (WTE).
With the variety of working options available today some employees may work part-time while others may only work at certain times of the year or in several other flexible ways. This metric provides a useful way to measure all of the hours worked by each type of employee thereby helping businesses organize their headcount more effectively.
How to Calculate Full-Time Equivalent
The FTE is calculated by taking into account the number of hours worked in a full-time weekly schedule and the actual number of hours employees work.
For example, if an employer considers 40 hours per week as full-time, employees who work 40 hours each per week count as 1.0 FTE, while those that work 20 hours per week, or part-time, make 0.5 FTE. In this case, two part-time workers would count as 1.0 FTE, and four part-time workers would count as 2 FTE. Various combinations can be created depending on the needs of the business.
Read our employer’s guide to find out more about how to hire employees in Europe, Asia, Africa, or elsewhere.
Video: What is an FTE? Definition of FTE
What Is The Purpose Of Calculating FTEs?
Identifying which employees are FTEs is essential for a number of reasons ranging from workforce planning to adhere to employment laws under the Affordable Care Act.
1. Workforce Planning
Calculating FTEs provides employers with a standardized measure to help them in workforce planning matters. It allows for comprehensive forecasting of the number of people needed to meet the demand for certain projects and, therefore, estimate the labor costs associated. This information consequently allows for more accurate budgeting as well as headcount analysis.
For example, a project that is estimated to take 600 hours of work can be accomplished in a variety of ways depending on your allocation of staff and time requirements.
It could require 15 full-time employees (600 hours/40 hours) five days to complete, 30 part-time employees five days to complete, one full-time employee 15 weeks to complete, or a combination of these.
Rather than hiring new employees, businesses can use FTE to deploy staff across various departments thereby keeping costs down. Depending on the type of work that is required, management can decide the number of full-time employees that are needed for a particular project and assign employees to those positions accordingly.
An understanding of FTE also helps employers decide when to hire staff for short-term projects. Since FTE measures the number of hours worked it allows an organization to calculate the number of full-time and part-time employees needed to complete a job thereby providing them with the most cost-effective way of staffing a project. In this way, scheduling projects based on the FTE calculation allows for greater accuracy in workforce planning and the efficient allocation of resources.
2. Affordable Care Act
Calculating FTEs will also determine an employer’s duties under the shared responsibility provisions of the Affordable Care Act.
This will allow an employer to determine the following:
- If it is an applicable large employer (ALE) and, if so, whether the shared responsibility provisions apply to them;
- Whether it needs to offer minimum essential health coverage or make an employer shared responsibility payment to the IRS; and
- The amount they are liable to pay the IRS for an employer shared responsibility payment. This is also known as “the employer mandate” or “the pay or play provisions”.
Read our employer’s guide to find out more about different types of insurance you can offer your employees.
Whether an employer is an ALE under the shared responsibility provisions will depend on the size of the organization. Those employing an average of at least 50 full-time employees including full-time equivalent employees are considered to be an ALE. A full-time equivalent employee refers to a combination of part-time employees that add up to one or more full-time employees. If an employer employs fewer than 50 full-time employees in the preceding year it will not be considered an ALE and, therefore, the employer will not be subject to the shared responsibility provisions for the current year.
For the purposes of these provisions, a full-time employee is considered to be an employee who has worked, on average, at least 30 hours per week during the calendar month or has worked at least 130 hours during the calendar month. In most cases, employers fall below the threshold required to be an ALE and are, therefore, not subject to the employer shared responsibility provisions.
The shared responsibility provisions require an ALE to do the following:
Minimum Essential Coverage: ALEs must offer their FTEs health insurance cover that is affordable and that provides minimum essential coverage to them and their dependents. If they do not, employers may be liable for a shared responsibility payment, also known as s Section 4980H penalty. The amount of the payment will depend on several factors, including the number of employees there are and the length of time that has passed without the employer offering minimum essential coverage.
Paperwork Requirements: ALEs also have information reporting responsibilities which require them to send reports to each full-time employee and to the IRS providing information on minimum essential health cover that the employer has offered to the employee including the cost and the time period for which the cover was made available.
If you’re offering health coverage to remote workers, there may be some additional considerations.
3. Access To Benefits And Programs
In addition to the above, FTE is also used to determine eligibility for certain federal programs and benefits. These include:
- The Paycheck Protection Program (PPP): This program provides small businesses with financial assistance of up to eight weeks through low-interest loans enabling employers to meet their payroll and other costs. The funds given under the PPP will be forgiven in certain circumstances.
To qualify for PPP loan forgiveness an organization must have maintained the same level of FTE employees during certain specified time periods following the loan disbursement.
- Small Business Tax Credit: The FTE metric is important for small business owners in determining whether they are eligible for a small business tax credit for employer-paid health care premiums. To qualify employers must employ less than 25 full-time or FTE employees in total. Eligible employers can apply for a tax credit in the amount of 50% of employer-paid health care premiums.
There are some exceptions when calculating FTE for the purposes of the small business tax credit. One FTE equals 2,080 hours per year and the total number of employees is taken into account rather than the number of hours they have worked. Certain employees are not included in the calculation such as owners, partners, shareholders, family members or relatives, and seasonal workers who work fewer than 120 hours per year.
How Horizons Can Help You Hire Full-Time Employees
Horizons can support your business by helping you hire full-time employees anywhere in the world. Whether you are looking to expand your business internationally, outsource your operations, or take on more remote staff contact us today to discuss your needs.
Frequently asked questions
100% FTE or 1.0 FTE refers to one full-time employee or a number of people who make up the duties of one full-time position.
If an organization considers full-time to be a 40-hour working week then one full-time employee will count as 100% FTE. 100% FTE can also be achieved in several other ways, for example, through two part-time employees (who each work 20 hours per week) or four employees who work 10 hours per week.
FTE refers to one full-time employee or the equivalent of a full-time employee.
In general, full-time means an employee who works 40 hours per week, although this can vary depending on the organization.
A full-time employee is equivalent to 100% FTE or 1.0 FTE.
