Is There Such a Thing as Self-employed Unemployment?

No small business owner wants to think about their company going under. But, planning ahead can help you prepare for the worst possible scenario—unemployment. Millions of people claim unemployment benefits each year in the United States. You might wonder if you can receive these benefits as a business owner. You must understand the rules on self-employed unemployment.

What are unemployment benefits, and who pays?

Employees who lose their jobs (through no fault of their own) can receive financial assistance through unemployment insurance benefits. The unemployed worker’s state provides payments, which are a percentage of what the individual would receive if they were employed. The unemployed individual must meet certain qualifications that are determined by the state.

Employers are required to pay for unemployment insurance in the form of two types of taxes: FUTA and SUTA. FUTA (Federal Unemployment Tax Act) and SUTA taxes are typically employer-only taxes, meaning employees do not pay.

FUTA tax is a percentage of each employee’s wages. The regular FUTA tax rate is 6% on the first $7,000 of each employee’s wages ($420 per employee), but you might qualify for a tax credit up to 5.4%. This means your FUTA tax rate would only be 0.6% on the same wage base of $7,000 ($42 per employee).

The SUTA tax rate is determined by the state. And, the wage base varies by state. SUTA tax rates are based on factors like your experience and industry. For more information, check with your state.

Does a business owner have to pay unemployment insurance tax if they don’t have any employees? You must pay for unemployment insurance only when you have employees. If you misclassify an employee as an independent contractor or do not register new hires with the state, they cannot receive unemployment benefits, and you will be penalized.

What is self-employment?

Self-employment depends on your business structure. Sole proprietors, partners, and limited liability company (LLC) owners are typically considered self-employed. Independent contractors are also considered self-employed. Generally, as a business owner, you are self-employed unless your business is incorporated.

When you are self-employed, you do not receive wages or have taxes taken out by an employer. You pay yourself from your business without withholding payroll (FICA tax) and income taxes. Instead, you are required to pay estimated taxes, which include self-employment and income taxes.

So the question is … can someone who is not an employee receive unemployment?

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Can you file for unemployment if you are self-employed?

Unemployment insurance for self-employed individuals doesn’t exist. You must be an employee whose employer pays FUTA and SUTA taxes to receive unemployment benefits.

Self-employed individuals are not listed as employees. If you are self-employed, you do not pay into the unemployment system for yourself.

Basically, your state needs to have received money to give money. Think of it like this: If you do not pay a car insurance premium and you get in an accident, will an insurance company cover you? No. Neither will the unemployment system.

Disaster Unemployment Assistance

There is one exception to the self-employed unemployment rule: You can receive financial assistance if the President of the United States declares there has been a major natural disaster.

The Disaster Unemployment Assistance (DUA) program works similarly to regular unemployment insurance. The DUA program pays you when you are not able to work. If you become unemployed directly because of a natural disaster, you might qualify.

You can receive Disaster Unemployment Assistance if you do not qualify for other unemployment benefits (e.g., self-employed individual).

To receive assistance, the following must be true:

  1. The President declared the event a major disaster
  2. You are not eligible for other unemployment benefits
  3. You cannot work as a direct result of the disaster (i.e., you no longer have a job or you cannot work because of a disaster-incurred injury)

You can only receive unemployment benefits for self-employed individuals under the Disaster Unemployment Assistance program.

Unemployment for business owners

Remember, not all business owners are exempt from unemployment insurance. You are only ineligible if you are self-employed.

If you want to receive unemployment insurance as a business owner, you must plan ahead. You have to lose the self-employed status. You need to change your business structure to become incorporated.

Corporations are separate legal entities from their owners. C corporations and S corporations are both incorporated businesses.

The majority of small businesses are actually structured as corporations.

To form a corporation, you must file with your state. You can form a C Corp by filing articles of incorporation with your state. As a C Corp owner, you are paid a salary.

Once your business is a C Corp, you can decide if you want to become an S Corp. You can form an S Corp by filing Form 2553, Election by a Small Business Corporation. As an S Corp owner, you must elect to receive a salary so you are paid as an employee.

Once you receive a salary, you do not need to pay self-employment tax.

After you are no longer self-employed, you must pay into unemployment insurance to have a chance of receiving benefits. But, the final decision as to whether you can receive unemployment benefits, even when incorporated, is made by the state. Contact your state before becoming incorporated.

Keeping track of your employer obligations can be difficult. If you need an easy way to run payroll, look no further. Patriot Software’s online payroll is done using a simple three-step process. Try it for free today!

This article has been updated from its original publication date of November 20, 2017.

This is not intended as legal advice; for more information, please click here.

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