Small Business: What It Means for Employers

What it means in practice

Whether a company is "small enough" to skip a rule depends on the rule. The phrase is used in at least three ways: eligibility for Small Business Administration (SBA) programs and federal contract set-asides, coverage thresholds in employment laws, and eligibility for certain tax programs. Each has its own measure and look-back period, so a company can be small under one test and large under another. Who counts as an employee for each count is its own question.

SBA size standards. Under 13 CFR 121.101, SBA size standards define whether a business is small and therefore eligible for government programs and preferences reserved for "small business" concerns. The table in 13 CFR 121.201 assigns a standard to each industry code in the North American Industry Classification System (NAICS). Each standard is the maximum number of employees or the maximum average annual receipts allowed for a business and its affiliates. The SBA says most manufacturers with 500 or fewer employees and most non-manufacturers with average annual receipts under $7.5 million qualify, with industry exceptions, and that standards are reviewed every five years. A firm in several industries is classified by its primary industry (13 CFR 121.107). The table governs SBA programs, not employment statutes: a restaurant that is small for an SBA loan can still be covered by the Family and Medical Leave Act (FMLA).

What counts as a "business concern." For SBA purposes a business concern is a for-profit entity with a U.S. place of business that operates primarily in the United States or contributes significantly to its economy (13 CFR 121.105). It may be a sole proprietorship, partnership, LLC, corporation or other listed form, and a firm that largely shares a predecessor's assets or liabilities is sized with the predecessor's receipts and employees.

How SBA counts employees. Under 13 CFR 121.106, SBA counts all individuals employed on a full-time, part-time or other basis, including workers obtained from a temporary agency, professional employer organization or leasing company. Unpaid volunteers are not counted. The figure is the average number of employees across each pay period of the preceding 24 completed calendar months, with part-time and temporary employees counted the same as full-time. A newer business averages the pay periods it has operated. Affiliates' averages are added in, and affiliation exists when one firm controls or has the power to control another, or a third party controls both, whether or not the control is exercised (13 CFR 121.103).

How SBA counts receipts. Receipts are all revenue from any source, reduced by returns and allowances, and are generally "total income" (or "gross income" for a sole proprietorship) plus cost of goods sold as reported on the federal tax return (13 CFR 121.104). Excluded are net capital gains or losses, taxes collected for a taxing authority, transactions with affiliates and amounts some agents collect for others; subcontractor costs and payroll taxes may not be excluded. For most programs, a firm with 5 or more completed fiscal years divides its last 5 years of receipts by 5; a younger firm divides total receipts by its weeks in business and multiplies by 52. SBA business loan, disaster loan, surety bond and SBIC programs let a firm with 3 or more years choose a 3-year or 5-year average.

Anti-discrimination laws: 1, 15 and 20 employees. The EEOC explains that one employee brings equal pay coverage, 15 brings the laws on race, color, religion, sex, national origin, disability and genetic information, and 20 adds age. Title VII defines an employer as one with 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year (42 U.S.C. 2000e(b)), and the ADA regulations use the same test (29 CFR 1630.2(e)). The ADEA uses 20 employees over the same 20-week period (29 U.S.C. 630(b)). The EEOC counts part-time, seasonal and temporary workers. See the Civil Rights Act of 1964, the Americans with Disabilities Act (ADA) and the Age Discrimination in Employment Act (ADEA).

FMLA: 50 employees, and 50 within 75 miles. A private employer is covered if it employs 50 or more employees for each working day during 20 or more calendar workweeks, not necessarily consecutive, in the current or preceding calendar year (29 CFR 825.104 and 825.105). Everyone on the payroll counts, including part-time employees and employees on leave who are expected to return; laid-off employees do not. Once covered, an employer stays covered until it has not employed 50 employees for 20 workweeks in both the current and preceding year. Employee eligibility is a separate test: the employee must work at a site where the employer has 50 or more employees within 75 miles, in addition to 12 months of employment and 1,250 hours (29 CFR 825.110).

ACA: 50 full-time employees, counting FTEs. The IRS says an employer that had at least 50 full-time employees, including full-time equivalent employees (FTEs), on average during the prior year is an applicable large employer (ALE) for the current year. Full-time means at least 30 hours of service per week or 130 hours in a month. FTEs are found by adding the monthly hours of all non-full-time employees, counting no more than 120 per person, and dividing by 120. The monthly totals for the year are added, divided by 12 and rounded down (26 CFR 54.4980H-2(b)). Seasonal worker and related-company aggregation rules can change the result. See the Affordable Care Act (ACA).

COBRA: 20 employees, counted differently. The Department of Labor says COBRA generally requires group health plans of employers with 20 or more employees in the prior year to offer temporary continuation coverage. The statute excludes a plan when all employers maintaining it normally employed fewer than 20 employees on a typical business day in the preceding calendar year (29 U.S.C. 1161(b)). Under 26 CFR 54.4980B-2, Q&A-5, that means fewer than 20 employees on at least 50 percent of typical business days. Part-time employees count as a fraction based on hours, and self-employed individuals, independent contractors and corporate directors are not counted.

WARN and EEO-1: 100 employees. The WARN Act covers a business that employs 100 or more employees, excluding part-time employees, or 100 or more employees, including part-time, who together work at least 4,000 hours a week, excluding overtime (20 CFR 639.3(a)). Nonprofits of that size are included. Covered employers must give at least 60 days' notice of a plant closing or mass layoff (20 CFR 639.2). For EEO-1, every employer subject to Title VII with 100 or more employees must file the report each year (29 CFR 1602.7); the EEOC adds federal contractors with at least 50 employees and at least $50,000 in government contracts.

FLSA: a dollar test, not a headcount. The Fair Labor Standards Act (FLSA) covers an enterprise with annual gross volume of sales made or business done of at least $500,000, plus hospitals, residential care institutions, schools, preschools and public agencies regardless of volume (29 U.S.C. 203(s)(1)). DOL Fact Sheet #14 adds that covered enterprises must have at least two employees, and that without enterprise coverage, employees are still protected if their work regularly involves interstate commerce, such as regular calls to other states or handling records of interstate transactions. A business under $500,000 can therefore still owe minimum wage and overtime to individually covered employees.

OSHA recordkeeping: 10 employees. Under 29 CFR 1904.1, a company with 10 or fewer employees at all times during the last calendar year does not need to keep OSHA injury and illness records unless OSHA or the Bureau of Labor Statistics tells it in writing to do so. The test uses company-wide peak employment. Every employer covered by the OSH Act must still report any work-related fatality, in-patient hospitalization, amputation or loss of an eye. See OSHA and OSHA Form 300.

IRS programs aimed at smaller employers. Form 944 is for employers whose annual liability for Social Security, Medicare and withheld federal income tax is $1,000 or less; they file and pay once a year instead of filing quarterly Form 941 returns. The IRS must first notify the employer in writing that it qualifies (26 CFR 31.6011(a)-4(a)(4)). The small business health care tax credit requires fewer than 25 FTEs, average annual wages below an inflation-adjusted amount per FTE (the IRS page, updated October 2026, lists $62,000 for tax year 2023 as its latest), a SHOP Marketplace plan (with a limited exception) and payment of at least 50 percent of employee-only premiums; the maximum is 50 percent of premiums (35 percent for tax-exempt employers) for two consecutive years. See tax credit.

Where states differ. State laws often reach employers below the federal thresholds; these two are examples, not a complete list. California's Civil Rights Department says the Fair Employment and Housing Act (FEHA) bars discrimination by employers of 5 or more employees, prohibits harassment in all workplaces, even those with only one employee, and requires employers with 5 or more employees to provide sexual harassment prevention training to supervisors and nonsupervisory employees. New York's Human Rights Law states that the term "employer" shall include all employers within the state (Executive Law 292(5)). See also California labor laws.

Recordkeeping that feeds each count. The tests use different periods: pay periods over 24 months for SBA, calendar weeks for Title VII and FMLA, monthly hours for the ACA and typical business days for COBRA. An EEO-1 filer must keep its most recent report at each reporting unit or at headquarters (29 CFR 1602.7).

Questions employers ask. Is a nonprofit a small business? Not for SBA size purposes, which apply to concerns organized for profit (13 CFR 121.105), but nonprofits count as employers under WARN (20 CFR 639.3). Do independent contractors count? Not toward the COBRA count (26 CFR 54.4980B-2); see independent contractor for how status is decided. Does falling below 50 end FMLA coverage right away? No; under 29 CFR 825.105(f), meeting the test in one year keeps an employer covered through the next. Does SBA status change employment-law duties? No; each law applies its own definition.

Why it matters and common mistakes

How Remindax helps

Related terms

See all terms in Org Structure, Strategy & General HR or browse the full HR Glossary.