Who Counts as 'Small'? The SBA Wants to Measure Most Businesses by Headcount Instead of Sales

Right now, an electrical contractor is small in the SBA’s eyes if its average annual receipts are $19 million or less. Under a proposal published Aug. 20, the same contractor would be small if it has 550 or fewer employees, no matter what it bills ^[1]. If you’ve ever bid on a small business set-aside or applied for an SBA-backed loan, the definition of “small” is the gate, and the Small Business Administration wants to rebuild it.

What the SBA proposed on Aug. 20

Two documents landed together in the Federal Register. One is a proposed rule that rewrites the agency’s table of size standards, the industry-by-industry limits that decide who qualifies for small business programs ^[1]. The other is a white paper explaining the math behind the new numbers, which the SBA calls its 2026 Revised Methodology ^[2].

Here’s the short version of what would change ^[1]:

• Fewer lines. Today there are 978 size standards set at the six-digit NAICS level (the federal industry codes). The proposal sets 338, using broader four- and five-digit groups, and drops all 18 special “exceptions.”
• Headcount over sales. Revenue-based standards would fall from 496 to 129, and employee-based ones would rise from 478 to 208.
• No ceiling. The current maximums of $47 million and 1,500 employees go away.
• A new floor. The smallest employee standard would be 500 workers, and the smallest receipts standard $30.6 million, which the SBA says is the original 1954 standard of $1 million adjusted for inflation and productivity ^[2].

That last item is new. The SBA has adjusted dollar standards for inflation before, most recently in an interim rule in November 2022, but it says it has never adjusted for productivity growth ^[1]. Its reasoning: an employee count already rises with productivity, because a more productive worker brings in more sales, while a fixed dollar figure doesn’t ^[2].

Why headcount? The SBA says employment swings less from year to year than revenue, so fewer firms would bounce between small and large ^[2]. It adds that, with a headcount standard, winning a contract won’t by itself make a firm large ^[2]. The law still requires a receipts standard for service industries, so the agency applied a test asking whether an industry mainly exists to transfer ownership of physical goods ^[2]. Construction trades and restaurants were among those moved to headcount; auto repair stays on receipts ^[1].

How we got here

The Small Business Jobs Act of 2010 requires the SBA to review every size standard at least once every five years and adjust them to “reflect market conditions” ^[3]. The SBA finished its first review in 2016 and its second in 2023 ^[1]. In that second round, its analysis suggested lowering 492 standards, and the agency held them steady because of the pandemic ^[1]. This proposal is the third review ^[1].

Size standards had a hearing of their own on Capitol Hill in February 2024. House Small Business Committee Chairman Roger Williams said afterward that “Antiquated standards leave small businesses behind” ^[4]. The SBA quotes that statement, and Ranking Member Velázquez’s call for “right-sizing” the standards, in its own justification ^[1].

Does this apply to you? Three hypotheticals

These are hypothetical businesses built on the SBA’s comparison table ^[1]. The SBA bases receipts standards on a five-year average and employee standards on a two-year average ^[2].

Hypothetical one: an electrical contractor with $23 million in average receipts and 140 employees. Today, at $19 million in receipts, this firm is over the line for NAICS 238210 and can’t compete for small business set-asides ^[1]. Under the proposal it would be measured against 550 employees, so it would qualify with room to spare ^[1]. The SBA counts this kind of firm among the newly small: its building equipment contractors group is one of four expected to gain more than 4,000 small businesses each ^[2].

Hypothetical two: a general auto repair shop with $12 million in average receipts. Auto repair stays revenue-based, but the number moves a lot, from $9 million to $44 million for NAICS 811111 ^[1]. The shop would go from too big to comfortably small.

Hypothetical three: a three-location sit-down restaurant group with 90 employees. Full-service restaurants currently use $11.5 million in receipts and would move to 850 employees ^[1]. Whether it’s small today depends on its sales; under the proposal, at 90 employees, it would sit far below the line. The SBA’s own example shows why it wants fewer codes: a restaurant that runs a lunch buffet and a sit-down dinner today has to figure out which service brings in most of its revenue, because buffets carry a $34 million standard ^[2].

Who’s out, and who might not like this

Almost nobody gets pushed out, and that’s a choice. The SBA’s formula pointed to lower standards in 45 industries, from bakery manufacturing to dry cleaning, and the agency proposes to keep their current numbers ^[1]. It cites the “difficult conditions small businesses faced during 2021-2024” ^[1]. The one exception is Direct Property and Casualty Insurance Carriers, which switches from 1,500 employees to $842 million in receipts; the SBA expects fewer than five firms there to lose small status ^[1].

The firms that should read this closely are the ones already near the top of their current standard. The SBA estimates 37,002 firms that held federal contracts in fiscal 2025, together accounting for about $71 billion in contracts, would become small ^[1]. In Engineering Services alone, 5,314 firms with contracts would newly qualify ^[1]. The agency says plainly that small firms closest to the current limits “are therefore likely to face the greatest competition from the newly eligible firms” ^[1].

Overall, the SBA puts the count of small firms at 6,344,967 now and 6,459,508 under the proposal, a net gain of 114,541 ^[1]. It describes the rule’s impact on 7(a) and 504 lending as minimal, since those programs have statutory caps ^[1]. Nothing in the proposal touches tax rules; it amends the SBA’s size regulations in 13 CFR part 121 ^[1].

My honest read on the process: cutting nearly a thousand codes to 338 would save a lot of small firms the “which code am I?” puzzle. But a proposal this broad, with its industry tables published as page images, will take most owners real time to check, and there are four weeks to do it.

What to do before Sept. 21

Find your primary NAICS code in the comparison table and write down both numbers. If your industry is switching to headcount, pull your payroll records for the past two years. Then decide whether you have something to say: the SBA specifically asks whether any industry moved to employees should stay on receipts ^[2].

If your firm bids on set-asides under one of the 18 exceptions being dropped, the SBA singles out Environmental Remediation Services as the one that might be affected and asks for comment on it ^[2].

Earlier this month I walked through the SBA disaster loans for Iowa and Pennsylvania. Those economic injury loans also depend on being small, and the SBA says newly small firms would be eligible for them after future disasters ^[1].

What I’m keeping an eye on

The comment deadline, Sept. 21. Both dockets close that day ^{[1, 2]}.

The final table. The SBA hasn’t said when it will finalize the rule or whether the 45 held-steady industries will stay that way. Until then, the current standards apply ^[1].

— Sally