How Does the Government Define “Small Business”?

When it comes to the government, “small business” is a relative term. What it means depends on whether it’s being applied to securing a loan, qualifying for government contract work, demonstrating health care insurance compliance, filing taxes, or a variety of other purposes.

Here’s a quick summary of the major government “small business” definitions that you should be aware of:

The Small Business Administration (SBA)

Based on its name, the Small Business Administration (SBA) would seem to be the logical source for a definitive answer to the question, “What’s a small business?” In a way, it is. For most industries, the SBA defines a small business as having under 500 employees. It also takes into account average annual receipts. For non-manufacturing industries, it defines small businesses with receipts ranging from $1 million to $47 million, depending on the industry.

However, the SBA actually publishes multiple definitions of “small business” depending on the industry. Consequently, the employee count for a “small business” can be higher in some industries than others. Further, some industries have their “small business” status qualified by annual sales volume rather than number of workers.

How many different definitions of small business will you find offered by the SBA? It offers a 41-page PDF that provides a table for each industry’s different small business size standards.

SBA “small business” definitions impact company eligibility for a number of sponsored programs. For instance, the SBA offers financial assistance and loan options for qualifying businesses. The SBA also has a mandate to ensure at least 23% percent of government contract work is sourced to small businesses. Additionally, the SBA administrates a number of “small business” counseling services via 68 district offices and hundreds of development centers.

The relevance of the SBA definition of “small business” isn’t limited to Small Business Administration programs, though. The SBA’s take on “small business” is the most frequently referenced definition when other government agencies need to communicate what they mean by the term. For example, the Regulatory Flexibility Act, which sets the protocol for assessing how EPA standards affect “small businesses,” directly references the SBA definition.

HealthCare.gov

The Small Business Administration is an important voice when it comes to government definitions of “small business,” but it isn’t the only government organization weighing in on the topic. The HealthCare.gov website created by the Affordable Care Act recently published a page under the headline, “What is considered a small business?” The HealthCare.gov take on the question differs from the SBA’s in two ways: it provides one single standard for all industries, and the term “small business” is limited to considerably smaller companies. Here’s the definition:

Under the health care law, a small business is one that has 50 or fewer full-time equivalent (FTE) employees.

The HealthCare.gov site further clarifies that a full-time equivalent employee is one “who works an average of at least 30 hours per week.”

Every business ultimately needs to understand the HealthCare.gov standards in order to make sure it complies with the Affordable Care Act. (You can find more info on specific compliance standards here.)

The Internal Revenue Service (IRS)

How does the IRS answer the question: “What constitutes a small business?” In general, it doesn’t. Not directly, at least.

Rather than provide its own definition of “small business,” the IRS enforces the definitions specified in individual tax statutes. For instance, the Affordable Care Act provides tax credits for companies under 50 employees that offer health insurance to workers. Qualified employers looking to access the tax credit will need to file IRS Form 8941.

While the IRS relies on the Affordable Care Act and SBA definitions in many cases for tax qualification specifics, it should be noted that the IRS does take its own stab at defining the term “small business” in one respect. The IRS sponsors what they call their “Small Business and Self-Employed Tax Center.” The audience for that resource is defined like this:

SB/SE serves taxpayers who file Form 1040, Schedules C, E, F, or Form 2106, as well as small businesses with assets under $10 million.