Full-Time Equivalent (FTE)Definition, and How to Calculate in Accounting

Sooner or later, you’ll have to hire employees to expand your business.

After all, there’s a limit to what one person can do.

Sure, you can operate your business with just you alone, but wouldn’t that be inefficient?

Imagine doing all of the administrative work, bookkeeping, manning the store, handling customers, purchasing supplies and materials, going to and from the bank, and many more.

Let’s say that these activities are done 10 to 20 times a day.

Now, think all of that handled by one person and imagine that person being you.

It may work for a while but as your business grows, so will the amount of things you have to do in a day.

A growing business will eventually need more staff to help with business operations.

And you can get such help by hiring employees be they full-time or part-time.

Most business owners are reluctant about hiring employees because they are worried about the costs.

You might go overboard with the hiring process and have a surplus of employees or you might overestimate the hours needed for a certain task.

Some business owners or hiring managers might incorrectly interpret that more employees automatically means more work hours.

But, having more employees does not necessarily mean more work hours.

Well, it would be if all you hire are full-time employees.

But in the case that you have a mix of full-time and part-time employees, the number of hours worked wouldn’t be the same as if you hired only full-time employees.

At least, that’s what the concept of Full-Time Equivalent (FTE) tells us.

What is this FTE you ask?

That’s what we will be talking about in this article.

We will define what FTE is, why it is important for businesses, and how to compute for it.

What is Full-Time Equivalent (FTE)?

Full-time Equivalent (FTE) is a unit of measurement that is equal to the work of an individual.

In business, it refers to the number of hours worked by a full-time employee.

For example, a full-time employee is expected to work 5 days per week, 8 hours per day.

That means that for a workweek, 1.0 FTE is equivalent to 40 hours of work.

FTE is used for the calculation of wages for budgeting purposes.

Instead of using the number of employees, FTE uses the number of hours worked instead.

That way, the number of hours worked by part-time employees can be measured in full-time hours.

To illustrate, let’s use the 40 hours/week example above (i.e. 1.0 FTE = 40 hours of work).

A business hires three part-time employees: Allison, Brax, and Carl.

Allison works 20 hours per week, while Brax and Carl individually work 10 hours per week.

Adding the number of hours worked by these three part-time employees, we arrived at a total of 40 hours which is equal to 1.0 FTE.

Meaning, the total weekly hours worked by the three are equivalent to the hours worked by a full-time employee.

FTE is particularly helpful for businesses that hire both full-time and part-time employees.

It allows the business to quantify all hours worked by both full-time and part-time employees in terms of full-time employment.

In terms of budgeting, salaries and wages will be calculated using the number of hours needed to complete certain tasks instead of the number of employees.

FTE can also be used to standardize the working hours and corresponding pay of part-time employees.

For example, if a full-time employee is expected to work 40 hours/week, then a part-time employee that works 10 hours/week is 0.25 FTE.

This part-time employee will receive 0.25 of a full-time salary.

Why compute FTE?

We already know that FTE helps in equating part-time work hours to full-time hours.

Other than that, FTE is used for the following purposes:

To calculate the total number of hours worked

Using FTE is often better than relying on the number of employees.

It shows the total number of hours worked by both full-time and part-time employees.

This is particularly useful for evaluating the efficiency of operations.

If the total number of hours worked exceeded the budgeted work hours, it could signify that some employees worked more hours than necessary.

FTE can also help in re-evaluating the budgeted work hours of a certain task/project.

For example, if a recurring task was expected to be completed within 20 hours/week, but the actual work hours constantly amount to 25 hours/week, then there might be a need to re-evaluate the budgeted work hours.

For resource management (as well as project management)

Using FTE, a business can use the total number of hours needed to complete a task or project as a basis for resource allocation.

For example, let’s assume that a business requires full-time employees to work 40 hours/week.

This business has an upcoming project that is expected to require 80 hours of work to be completed, equivalent to 2 FTEs (1 FTE = 40 hours of work).

The business can then decide on how to assign the project:

• If the business needs the project to be completed in a week, then the project could be assigned to 2 full-time employees; it could also be assigned to 4 part-time employees that work 20 hrs/week (0.5 FTE)
• The project can be assigned to 1 full-time employee and have it be completed within two workweeks. The same result can be attained if the project is assigned to part-time employees whose total FTE is equal to that of one full-time employee
• The project can entirely be assigned to part-time employees; depending on how soon the project needs to be completed, the number of part-time employees to be assigned will change; if the project is needed to be completed within a week, then the total FTE of the part-time employees must be 2 FTE.

FTE also helps in determining the labor costs to be incurred by tasks or projects.

For analysis and comparison with industry standards and other business

Picture this: company A and company B are both engaged in the sale of bottled water.

Both companies have 20 employees.

Company A’s employees all work full-time. Company B’s 20 employees are composed of 10 full-time employees, and 10 half-time employees.

Now, would it be fair to compare the two company’s output using the number of employees?

I’d say not.

Having part-time employees causes a business to inflate its staff size.

It can also affect headcount calculation.

Part-time employees don’t work the same hours as full-time employees do.

They typically work fewer hours.

Company B may have the same number of employees as company A, but the number of work hours they render isn’t the same.

Assuming that the employees have the same competency and that the two companies use the same technology, company A will always produce more output than company B.

Even if they have the same number of employees.

Instead of using the number of employees, FTE should be used instead.

If a full-time employee is equivalent to 1 FTE, then it should follow that a half-time employee is 0.5 FTE.

Thus, company B has an FTE of 15 even though it has 20 employees.

This will be taken into account when comparing with other businesses such as company A.

To fulfill tax obligations

The Internal Revenue Service (IRS) requires businesses to compute their FTE at the end of every fiscal year.

This is because FTE is important in determining whether a business is considered an applicable large employer (ALE) or not.

If a business’s FTE equates to the work of at least 50 full-time employees (even if a majority of its employees work part-time), then it is considered an ALE.

This is important as an ALE must comply with health insurance and health benefit regulations imposed by the US healthcare system.

How many hours of work does a full-time employee typically render?

There is no one standard as to how many hours a full-time employee is expected to render. It really depends on business policy.

A business may consider 40 hours/week to be the expected number of hours a full-time employee must render.

Another business may consider 32 hours/week as full-time hours. Both are valid.

In actual practice, a full-time workweek is typically between 32 and 40 hours per week.

A 40 hours workweek (8 hours per day, 5 days per week) is more commonly employed by businesses though.

That said, the IRS mandates that in terms of FTE calculation, a full-time employee in the US renders 30 hrs per week or 130 hours per month.

This is only significant for determining whether a business is considered an ALE or not. It is not the standard for computing FTE for business purposes.

Calculating Full-Time Equivalent (FTE)

Before we go with the actual calculation, let’s discuss some considerations first.

If you’re calculating FTE to determine whether a business is an ALE, then you must remember that the standard full-time work hours are 30 hours per week or 130 hours per month.

Additionally, the work hours rendered by the following should not be included in the calculation of FTE:

• Employees (U.S. citizen or not) working outside the U.S.
• A partner rendering services in a partnership
• Shareholder/s of an S corporation holding at least 2% of the corporation’s stocks
• Leased employees
• Real estate agents or direct sellers

If you’re calculating FTE to determine whether a small business is eligible for a small-business tax credit, then the work hours rendered by the following must be excluded:

• Owner/s of the business (sole proprietor, partners in a partnership)
• Shareholder/s of an S corporation holding at least 2% of the corporation’s stocks
• Corporate shareholders owning more than 5% of the stock
• Spouse, children, family members, or spouses of family members of the owner/s
• Seasonal workers (unless they work more than 120 days in a year)

If the FTE of a business is 25 or less, it might qualify for a small-business tax credit.

With that out of the way, let’s start calculating FTE.

Determine the number of hours worked by a full-time employee

The number of hours worked by a full-time employee will depend on the business’s policy.

It could be 40 hours/week, 35 hours/week, or 150 hours/month.

All of them are valid.

For now, let’s assume that a business requires a full-time employee to render 40 hours per week.

That means that 1.0 FTE = 40 hours.

If an employee only rendered 30 hours/week, then that employee’s FTE is 0.75.

List your employees, their classification (full-time or part-time), and the number of hours worked

Prepare a list of the business’s employees.

This is so that we can determine the total number of hours worked by the business’s employees, be they full-time or part-time.

You may consider deducting approved leave hours in the computation.

Alternatively, you may consider including paid leave and deduct any other leave hours in the computation.

Calculate the number of hours worked for the period your want to compute your FTE for

For example, if you want to compute the FTE of a week, then FTE will be equal to the number of hours worked in a week.

If you want to compute the FTE of a month, FTE will be equal to the number of hours worked in a month, so on and so forth.

For this exercise, will be computing the FTE for a year. The number of work hours and workweeks will depend on business policy.

The maximum amount of weeks in a year is 52 weeks, however, this is assuming that employees will still work on holidays.

The FTE for the year would be:

FTE = number of work hours per week X number of workweeks

= 40 x 52

= 2,080

Meaning that a full-time employee is expected to render 2,080 hours of work per year.

Add up the number of hours worked by full-time employees

Let’s assume that the business has 10 full-time employees and that they rendered 2,080 hours each for the year.

The total number of hours worked by full-time employees is 20,800 (2,080 x 5).

Add up the number of hours worked by part-time employees

Let’s assume that the business has 15 part-time employees, 10 of which rendered half-time hours (1,040 hours each), and 5 of which rendered 520 hours each.

The total would then be:

# of hours worked by part-time employees = (10 x 1,040) + (5 x 520)

= 10,400 + 2600

=13,000

The total number of hours worked by part-time employees for the year is 13,000.

Calculate FTE

The last step is to add up the number of hours worked by full-time employees and part-time employees, which is 33,800 (20,800 + 13,000).

We then divide the total by the equivalent of 1 FTE. In this case, 1 FTE = 2,080 hours.

FTE = Total number of hours worked ÷ 2,080

= 33,800 ÷ 2,080

= 16.25

This means the business’s employees are rendering work hours equivalent to that of 16.25 full-time employees.