Can a Small Business Owner File for Unemployment?

We hear a lot about unemployment benefits for laid-off employees. But what about unemployment benefits for business owners? Are you out luck if your small business was unlucky?

Normal circumstances would make you eligible for unemployment benefits if you were paid a regular salary by your small business and you paid unemployment taxes on this salary. The coronavirus epidemic has made it difficult to live in normal times. New policies have been developed to provide unemployment compensation for more self-employed people.

How the CARES Act affects unemployment benefits

The federal Coronavirus Aid, Relief and Economic Security Act was passed by federal lawmakers. This Act significantly increased unemployment benefits. Many self-employed workers are eligible for unemployment benefits under the Pandemic Employment Assistance provision. This includes sole proprietors, independent contractors, as well as gig workers. 

The CARES Act extends unemployment benefits for 13 more weeks (to a maximum 39 weeks) and provides $600 per week in compensation.

Small business owners can apply for unemployment in much the same way as other individuals through the CARES Act. You must be unable to work because of COVID-19-related impacts, such as the closure of a business. You can apply for unemployment benefits in your state. You will need to apply and be rejected by some states for the standard unemployment benefits. Before you can apply for pandemic unemployment aid, 

Learn more in FindLaw’s Unemployment Insurance and COVID-19 section.

How Unemployment Benefits Usually Works

While every state operates its unemployment benefit programs in a different way, there is a general rule for small business owners regarding unemployment: If you pay into the system, you get paid.

If your small business has paid unemployment taxes on your income, you may be eligible for unemployment benefits. But here’s why that could be a problem for some entrepreneurs and small business owners: depending on your corporate structure, you may not have been paid a normal salary.

Structure and Salary

If your small business was a sole-proprietorship, you may have not been earning a regular income. Many sole proprietors or partners choose to cover their living expenses with the company’s profits. If you have not been contributing to your state’s unemployment insurance fund, your benefits will likely be withdrawn in normal times. However, shareholders and owners of S corporations and limited liability companies (LLCs), may take home regular salaries and can opt in to their state’s unemployment program. This will grant them benefits if the company goes under.

Do not forget the other requirements

However, unemployment taxes are not the only requirement to be eligible for unemployment benefits. Out-of-work entrepreneurs who are seeking unemployment must meet the same requirements as terminated employees. They must be available to work and unable find similar employment. Depending on where you live, there may be additional factors.

On top of that, some states have strict prohibitions on collecting employment if you’ve fired yourself. It may be difficult to prove you are unable to find work after closing down your business.

An experienced employment law attorney can help you determine if your business should be closed down and whether you should file for unemployment. You may also be eligible for financial assistance through the U.S. Small Business Administration and your state if your business is in financial trouble as a result of the coronavirus epidemic.

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Cyndy Lane