Let’s say your growing ecommerce company employs five people: three full-time employees working 40 hours each per week and two part-time team members working 20 hours each. While the total headcount is five, this number doesn’t reflect the true capacity. The part-timers together work the same number of hours as one full-time role, so your company effectively has four full-time equivalent (FTE) employees.

The FTE calculation looks past simple headcount to measure a company’s total workforce capacity based on hours worked. By converting employee hours into a standard unit, this key metric provides clearer insight for strategic planning, budgeting, and legal compliance. Learn how to calculate FTE for your business, understand when you need to use it, and discover how this metric helps you make smarter staffing and budgeting decisions.

What does full-time equivalent (FTE) mean?

Full-time equivalent (FTE) is a unit that measures employee hours against a full-time workload, calculated by dividing the total hours worked by the number of hours in a standard full-time schedule. This clarity prevents costly hiring mistakes and ensures compliance with labor regulations.

One FTE represents the workload of a single full-time employee. Although this is typically calculated based on a 40-hour work week, the exact number of hours varies by business.

The FTE metric lets you combine all employee hours—full time or part time—into a single measure of total workforce capacity. For instance, rather than budgeting separately for two full-timers, three 20-hour part-timers, and one 10-hour employee, you can take a broader view. By totaling the hours (150) and dividing by the 40-hour full-time standard, you arrive at a single, clear metric: 3.75 FTE of total work capacity. This standardized number makes it far easier to plan projects, estimate labor costs, and allocate resources effectively.

This metric is essential for project planning, budgeting, and compliance with regulations such as the Affordable Care Act (ACA). It offers a clearer picture of your team’s true working capacity and payroll obligations, helping you make better staffing, resource allocation, and growth decisions. 

Legally, independent contractors are not included in FTE calculations for compliance purposes (like ACA or IRS reporting). But you might choose to include them in your internal or operational estimates for a fuller view of your total labor capacity. Just be sure to keep these separate when reporting for legal or regulatory reasons.

How do businesses use the FTE metric?

• Forecasting and financial planning
• Project management
• Benefits administration and compliance
• Strategic workforce planning
• Comparing workforce data

Businesses of all sizes can use the FTE calculation for a variety of important functions, including:

Forecasting and financial planning

FTE is fundamental for forecasting payroll expenses. Knowing the total number of full-time equivalents makes it easier to estimate labor costs, including salaries, benefits, and payroll taxes. This helps with financial planning and preventing budget overruns. 

When planning for the next fiscal year, knowing your FTE count can help you allocate the appropriate amount of resources to cover your workforce needs.

Project management

When planning for new projects, you need to know your team’s true capacity. FTE offers a clear picture of the employees’ work hours, letting you assign tasks and determine if additional staff are needed. 

If a project requires 1,200 work hours over a specific period, you can use the FTE value to determine whether your team can meet the demand or if you need to hire temporary help or independent contractors.

Benefits administration and compliance

In the US, the most significant regulatory use of FTE is for the Affordable Care Act (ACA), which requires applicable large employers (ALEs)—generally those with 50 or more full-time equivalent employees—to offer affordable health insurance to their full-time staff. 

The FTE calculation is the specific formula used to determine if you meet this threshold. Miscalculating FTE could lead to penalties. This compliance requirement applies to all business types, whether you’re an LLC, corporation, or partnership.

Strategic workforce planning

FTE data can help you analyze productivity and efficiency. Compare FTE numbers over time to identify trends, assess staffing levels, and make decisions about employee hiring, restructuring, or downsizing. 

FTE gives you a simple way to match workload demand with workforce capacity. For example, if handling your current inquiry volume requires 200 hours per week, that translates to 5.0 FTE (200 divided by 40). You can then compare this to your team’s actual capacity. If your current staff works a combined 180 hours—equivalent to 4.5 FTE—you know you’re understaffed.

Comparing workforce data

Knowing whether you’re overstaffed or efficient compared to competitors can reveal thousands in potential savings or identify growth bottlenecks. FTE makes these comparisons possible through standardized benchmarking.

You might compare your company’s revenue per FTE to an industry average. If yours is $250,000 and the benchmark is $350,000, it could point to inefficiencies or issues with your pricing strategy. Or, if a report shows the average competitor has 4.2 FTEs in finance and your similarly sized company has 7, it may mean inflated administrative costs.

How to calculate FTE

1. Define “full time” for your organization
2. List employees and hours worked
3. Separate full- and part-time employees
4. Count full-time employees
5. Calculate part-time FTE
6. Combine totals

The FTE calculation adds the total hours worked for all employees—both full time and part time—and then divides that by the number of hours that defines a full-time workload. Here’s how to calculate FTE step by step for internal purposes, taking care to consult the IRS guidelines when calculating FTE for tax or compliance reasons:

1. Define “full time” for your organization

Before you can calculate FTE, you must establish the standard for a full-time worker in your company. Although a 40-hour week is the traditional benchmark for a full-time employee in the US, it’s by no means a legal mandate or global standard. The most common standards used are:

• Hours per week. A full-time employee is usually considered to work 40 hours per week

• Annual work hours. Often calculated as 40 hours per week x 52 weeks per year = 2,080 hours

Your definition must be consistent. For ACA purposes, for example, the IRS defines a full-time employee as someone who works an average of at least 30 hours per week, or 130 hours a month. This means you must use the 30-hour standard for all ACA-related calculations, even if you use 40 hours for internal budgeting.

2. List employees and hours worked

Create a list of every employee on payroll over a specific period (e.g., a week, month, or the previous calendar year). Record the actual hours worked for each employee.

When calculating FTEs for tax purposes, you should typically exclude owners of a sole proprietorship or partners in a partnership. For an S corporation, shareholders owning more than 2% are excluded. Similarly, for a C corporation, shareholders with more than 5% ownership are excluded. Owner spouses and family members are usually excluded. For ACA calculations, seasonal workers might be excluded if they work 120 days or fewer during the year, but their hours should be tracked. 

Here’s an example with four employees over a single week:

• Employee A. Works 40 hours.

• Employee B. Works 40 hours.

• Employee C. Works 20 hours.

• Employee D. Works 10 hours.

3. Separate full- and part-time employees

From here, separate full-time from part-time employees:

• Full-time employees. Those who work the number of hours your organization defines as full-time (e.g., 40 hours per week).

• Part-time employees. Those who work fewer than the defined full-time hours.

In our example:

• Full-time. Employee A, Employee B

• Part-time. Employee C, Employee D

4. Count full-time employees

Add the number of full-time employees. Each counts as one FTE. This is the first part of your FTE calculation:

Number of full-time employees = 2 (Employee A and Employee B)

5. Calculate part-time FTE

Now, turn to your part-time workers. Calculate the combined hours worked by your part-time employees over the chosen period. In this case:

20 hours (Employee C) + 10 hours (Employee D) = 30 total part-time hours

Divide this amount by the number of hours in a full-time work period. If using a weekly period of 40 hours:

30 hours / 40 hours = 0.75

This means your part-time staff are equivalent to 0.75 of a single full-time employee.

6. Combine totals

Add the number of full-time employees to the FTE of your part-time employees to get your total FTE count:

Total FTE = (Number of full-time employees) + (FTE of part-time employees)

Total FTE = 2 + 0.75 = 2.75

So for this single week, your organization has 2.75 full-time equivalent employees. This actual number is more insightful than saying you have four employees.