It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

F is for FTE.

FTE is one of those terms that many folks had never heard of before the Paycheck Protection Program (PPP). But FTE did exist. In the pre-PPP world, FTE (full-time equivalent) means the hours worked by an employer on a full-time basis. And before COVID-19 and Small Business Administration (SBA) loans, FTE was typically a measure of how part-time employees compared to full-time employees for the sake of, among other things, determining payroll efficiency.

The PPP uses FTEs as a metric to compute loan forgiveness. Specifically, one of the loan forgiveness conditions is proving that you maintained the same number of FTEs during the 24-week PPP period as you did before COVID-19. The actual number of employees may not be the same as it was pre-COVID-19 (due to turnover, different levels of hiring, etc.), but the FTE needs to remain the same.

Treasury defines an FTE as an employee who works at least 40 hours per week. So, 40 is your benchmark with some exceptions:

• Overtime doesn’t count: if you work 80 hours per week, you don’t count as two FTE. You’re still just one FTE.
• Part-time hours do count, however. To figure your FTE for part-time workers, add up their average hours, and divide by 40. So, if you have five employees who each work 12 hours per week, that’s 60 hours. Those folks don’t count as five employees: they count as 1.5 FTE (60/40=1.5).

Here’s a quick example:

Let’s say that you have four employees who work 40 hours or more, and the same five part-time employees as above. For PPP purposes, you don’t have nine employees: you have 5.5 FTE (four full-time FTE + 1.5 part-time FTE).

Got it?

If that math is too complicated, you can use fixed numbers of 1.0 for full-time employees and .5 for everyone else. However, if you opt for the simple version, you have to use it consistently throughout PPP (no mixing calculations).

If you reduce salaries or wages, but not hours, you may still have to reduce FTE. The quick and dirty rule is this: calculate the average annual salary or hourly wages during the covered period and divide it by the average annual salary or hourly wages of the look-back period. If that number is more than .75, there is no salary or hourly wage reduction. If it’s less, then you may need to reduce FTE (or see if you qualify for a safe harbor).

Why does all of this matter? It goes back to PPP loan forgiveness. If you reduce the number of FTEs during the covered period, your loan forgiveness piece will be reduced proportionately.

There are some exceptions to the reduction, as you’ve no doubt heard. Most notably, if you offer to rehire an employee (in writing) and the employee was fired for cause, turned your offer down completely, or asked for a reduction in hours, you may be able to exclude them in your calculations. As with all tax and financial matters, keep excellent records to support these positions.

There are also some safe harbors. If you weren’t allowed to operate because of COVID-19 related restrictions or if you were able to restore your FTE to pre-COVID levels by the end of the year, you may still qualify for forgiveness.

Since this part of my A to Z series, this post is meant to be a quick primer. It’s not intended to be exhaustive. Entire articles have been written on the calculations alone (not to mention the safe harbors), and that doesn’t even include the numerous changes and clarifications from Treasury… You get the point. If you have specific questions, be sure to check with your tax professional.

You can find the rest of the series here:

Kelly Erb is a tax attorney, tax writer and podcaster.

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