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How Small is a Small Business?

 

“How small is a small business?” It seems like a pretty simple question, but perhaps surprisingly, it does not have a simple answer. The United States does not have a consistent standard, as different agencies and organizations have their own standards and cutoff points. However, if you have under five employees, like most of the Community Enterprise Clinic’s clients do, the recently passed mandates for small businesses do not apply.

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  Biden Administration:

The Biden administration recently announced that they plan to implement a mandate that will require employees be either vaccinated or tested regularly if they work at a company with at least 100 employees. It is unclear exactly why the Biden administration chose to make the cutoff at 100 employees, other than the fact that 100 is a round number and easy to remember. Even though only 2.3% of firms (firms in this case are single businesses or groups of businesses owned by the same entity, in the same industry and geographic area) have 100 or more employees, those large firms account for where 67% of employees work. Interestingly, 89% of firms have under 20 employees, but firms with under 20 employees account for only 16% of where employees work. Based on where the Biden administration has placed the cutoff for their mandate, it would seem as though they have a small business cutoff at 100 employees.

Small Business Association (SBA):

The Small Business Association (SBA) has requirements that vary by industry, but their typical range to be classified as a small business is between or below 50 and 1,500 employees (Note: the SBA counts all employees, so this includes part-time, temporary, and even terminated employees) AND between or below $1 and $41.5 million in annual receipts (where annual receipts is the business’ total income plus the cost of goods sold). The SBA also has other requirements to be considered a small business such as:

      ●      Being a for-profit business structure (like an S Corp. or an LLC)

●      Being independently owned and operated

●      Not being nationally dominant in the field of business

●      Being physically located in and operating in the USA or its territories 

Provided that they meet other criteria, the SBA does not immediately dismiss a business as being classified as a “small business” until they exceed 1,500 employees or $41.5 million in annual receipts. To learn more about the size standards for the SBA click here.

Affordable Care Act (ACA)

Unlike the SBA, the Affordable Care Act only requires businesses to include full-time and full-time equivalent (FTE) employees when they are determining how many employees they have. Full-time equivalent employees can be calculated here, and is essentially the number of full-time employees the business would need to have employed in order to work all of the hours being worked by part-time employees. After doing this full-time equivalent calculation, the Affordable Care Act considers an employer to be a small employer if they have fewer than 50 full-time or FTE employees. If a business has over 50 full-time or FTE employees, the ACA classifies them as an applicable large employer (ALE).

Having fewer than 50 employees allows the business to purchase insurance through the SHOP marketplace, and means that the business does not need to meet the Affordable Care Act’s employer-shared responsibility provisions. The employer-shared responsibility provisions require that the employer either offer “minimum essential coverage” to their employees, or that the employer make an employer shared responsibility payment to the IRS.

The Affordable Care Act makes their cutoff for “small business” to be at 50 full-time or full-time equivalent employees.

Internal Revenue Service (IRS)

The IRS does not even have a standard for “small business” based on the number of employees that a business has. They instead use individual tax laws and base their classification on what IRS forms are filled out and sent to the IRS. If a business fills out a Form 1040 or 1040-SR, a Schedule C, E, or F, or a Form 2106 the IRS may consider them to be a small business. The IRS also considers a small business to be any business with under $10 million in assets.

The Biden administration says a small business has under 100 employees, the SBA says a small business is between or below 50 and 1,500 employees, the ACA says small business have fewer than 50 full-time employees, and the IRS does not have any clear guidelines besides the business having under $10 million in assets.            

Small businesses likely do not have established human resources departments or lawyers working for them, and the government’s inability to have a clear and consistent definition for what a “small business” is likely leads to a lot of confusion and weird growth incentives for them. Most of the Community Enterprise Clinic’s clients have under 5 employees, and almost all the clients are under 30 employees. As such, they would be considered a small business by all these different government agencies. They are exempt from the Biden administration’s mandate of vaccinations or regular testing. They qualify under the Small Business Association and therefore can potentially receive small business loans and have access to some entrepreneurial development programs. The clinic’s clients are also small enough to where they are not obligated to provide medical insurance (or make payments to the IRS) under the Affordable Care Act.

By: Daniel Weiss

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