How Does the Government Define “Small Business”?

Last Updated: January 16th, 2023
Researched and Written by: Adam Bluemner

The federal government can’t quite make up its mind about what constitutes a “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:

Source: US Small Business Association (SBA) Internal Revenue Service (IRS)
Standard: 500 employees or less–generally. 50 employees or less. Dependent on individual tax law statutes.
Used for: Determining eligibility for government loans, consulting, and contract work. Defining Affordable Care Act compliance and employer health insurance requirements. Calculating company tax responsibility.

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 of, “What’s a small business?” In a way, it is. For most industries, the SBA defines a small business as having under 500 employees.

But the SBA actually publishes multiple “small business” definitions depending on 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? Would you believe there is a 46 page PDF available that provides a table for all the different “small business” definitions? If you don’t, you should, because it exists.

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” also happens to be 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 protocol for assessing how EPA standards affect “small businesses,” directly references the SBA definition.

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 website created by the Affordable Care Act recently published a page under the headline, “What is considered a small business?” The 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:

If you have 50 or fewer full-time equivalent (FTE) employees you’re considered a small business under the health care law.

The 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 standards in order to make sure it’s in compliance with the Affordable Care Act. (You can find more info on specific compliance standards here.) Beginning November 1st, 2014, companies under 50 employees will also gain access to purchase employee health insurance through the Small Business Health Options Program.

The Internal Revenue Service (IRS)

How does the IRS answer the question: “What constitutes a small business?” In general, it actually 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 which 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.

Talk with a software advisor
Talk with an advisor
Get a free consultation from an independent software expert.
Or, call toll-free: (800) 827-1151
Talk with a software advisor
Talk with an advisor