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Can Small Business Owners File for Unemployment?

Can Small Business Owners File for Unemployment?
Susan Guillory

Susan Guillory

Updated December 20, 2021
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If your small business has hit a slump, due to the pandemic or other unfortunate circumstance, any employees you let go will be able to file for unemployment benefits. You may wonder, however, if the same applies to you: Can small business owners file for unemployment? Is your only option small business bankruptcy?In some cases, small business owners may be able to file for unemployment. It just depends on how you've been paying yourself and whether you've paid into unemployment insurance. Let's get into the details.

Is Pandemic Unemployment for the Self-Employed Still Available?

Many small businesses, independent contractors, and gig workers took an economic hit as a result of the coronavirus pandemic. As part of the CARES Act, federal lawmakers expanded unemployment benefits significantly. The Pandemic Unemployment Assistance  (PUA) provision allowed many self-employed workers to receive unemployment benefits who normally wouldn't, including sole proprietors, independent contractors, and gig workers.Unfortunately, the PUA program expired on September 5th, 2021 That means only individuals who qualify as employees are currently eligible for unemployment benefits. Those who are self-employed no longer qualify.

How Do Unemployment Benefits Work?

When employees are laid off or let go from a company, they are typically entitled to temporarily receive a portion of their previous salary in the form of unemployment benefits. People who quit their jobs or were fired because of poor performance are generally not eligible. Unemployment benefits vary from one state to another, but generally can last up to 26 weeks. To qualify, individuals must be ready and willing to work and unable to find comparable employment. There may be additional requirements depending on which state you live in.Unemployment insurance is financed by taxes paid by employers.

What Types of Business Owners are Eligible for Unemployment Benefits?

Whether or not a small business owner can file for unemployment will depend on what state they live in, how their business is set up, and how they pay themselves. Here are some general guidelines that can help you decide if you should apply for benefits.

1. Sole Proprietorships

If you are the sole proprietor of a business, you likely do not pay yourself wages and unemployment taxes. If that’s the case, you probably do not qualify for unemployment for small business owners.

2. S Corporations

If you operate as an S corporation, you may be required to pay yourself wages, as well as state unemployment insurance tax on those wages, just as you do any other employee. If so, you can likely qualify for unemployment benefits.  You may want to keep in mind, however, that generally a business owner has to cease business operations entirely in order to be eligible. This shows that you are, indeed, separated from the company. “Firing yourself” due to a slowdown in business is not likely to make you eligible for unemployment.

3. Business Owners Not Earning Wages

If you operate your business as a partnership (such as an LLC or LLP) or a corporation, but haven’t been drawing a regular paycheck or contributing to your state’s unemployment insurance fund, you are likely not eligible for unemployment benefits. If you only take money from your company as you need it, or only take money through distributions or dividends, you’re generally not considered an employee unless you are also drawing regular employee wages. Changing your status and making yourself a W-2 employee of your company shortly before shutting it down isn’t likely going to help your case either. Many states have rules about required minimum lengths of employment to qualify for benefits. 

How Small Business Owners Can File for Unemployment

If you believe you qualify for unemployment benefits, you may want to start by visiting your state’s Employment Development Department (EDD) website to review requirements and to start the application process. You’ll likely need to have certain documents on hand, such as your driver’s license, Social Security card, and/or passport, and need to submit certain information, such as details on your last employer (that’s your company), the last week you worked, and your total gross earnings for the last week you worked.You may also need to provide information on any other employers you have had over the past 18 months, as well as your net income. Some states may require you to have an interview with a representative from the EDD. Once approved, you may need to verify whether you have looked for work or worked at all during a given pay period so your unemployment benefits can be accurately calculated. 

Other Small Business Financial Relief Options

If you don’t qualify for unemployment benefits, but still need a solution to cover a gap in income until business picks up, there are a number of small business funding options to consider.

SBA Disaster Loans or Grants

If your business was negatively impacted by COVID-19, you may qualify for a COVID Economic Injury Disaster Loan (EIDL), up to $2 million, or a COVID EIDL grant, up to $15,000.  Both are offered by the U.S. Small Business Administration (SBA) and you can apply for these programs on the SBA'S EIDL portal until December 31. 2021. If you’ve already applied and want to request a loan increase or reconsideration of a denied application, those will continue into 2022.   Traditional EIDL loans offer funding for business owners that have been affected by a natural disaster, such as a flood, drought, or hurricane. These will continue to be available.

Other SBA Loans and Grants

In addition to the EIDL program, the SBA offers many other loans to small businesses, such as the 7(a) loan program. SBA loans tend to have the lowest interest of all your options.In addition, the SBA offers other types of grants to small businesses that do not have to be repaid.Recommended: SBA Loans for Independent Contractors and the Self-Employed 

Small Business Loans

You may qualify for a traditional loan from a bank, credit union, or online lender. Some require higher credit scores, while others have less stringent requirements, though may offer less favorable terms.Recommended: Applying for a Small Business Loan in 6 Steps 

Emergency Funding Options

If your revenues and credit scores are down, you may be limited to applying for higher-interest options like a merchant cash advance Even if you have to pay higher interest, an emergency business loan could ensure you have the money you need to pay yourself and your business expenses until you once again have a successful small business, especially if you don’t qualify for unemployment.

Crowdfunding

Crowdfunding is the use of small amounts of capital from a large number of individuals (a.k.a., the “crowd”) to finance your business. If you opt for reward-based crowdfunding, investors receive a reward for investing and you get to keep ownership of your business. To go this route, you typically have to create a campaign on a crowdfunding site that gets people excited about your business.

The Takeaway

Whether or not you can file for unemployment as a business owner generally depends on whether you get a regular paycheck from your company, pay unemployment taxes, along with several other factors. It can be a good idea to check in with your state, since these benefits are administered at the state level. If you don’t qualify, there are other ways to help keep your business afloat during a slump. If you’re interested in investigating loan options without making any type of commitment, Lantern by SoFi can help. With our online lending platform, you can explore rates from multiple small business lenders with just one application.
Photo credit: iStock/FlamingoImages
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC112247

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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