A full-time equivalent is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080. See the IRS Web site’s FAQs with regard to additional information on determining full-time equivalents for the small business tax credit.

Average annual wages are determined by dividing the aggregate amount of wages which were paid by the employer to employees during the taxable year by the number of full-time equivalent employees. For purposes of calculating average wages, only use employee’s wages up to 2,080 hours of work. The result is then rounded down to the nearest $1,000.

Seasonal workers are not used in the calculation of full-time equivalent employees for purposes of the tax credit if the worker works for the employer on less than 120 calendar days during the taxable year. If the employee works more than 120 days, they will be counted towards full-time equivalents.

Certain employees are not considered as such if they are a 2 percent shareholder or a 5 percent owner. Leased employees are counted.

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