Can a Small Business Owner File for Unemployment?
We hear all the time about unemployment benefits for laid-off workers. But what about unemployment benefits for business owners? If you owned an unlucky small business (or you owned a business during an unlucky time such as the COVID-19 outbreak), are you out of luck when it comes to unemployment?
In normal times, you would only be eligible for unemployment benefits if your small business 1) paid you a regular salary, and 2) paid unemployment taxes on your salary. However, the coronavirus outbreak has us living in a time that is anything but normal, and new policies have been created to provide more self-employed individuals with unemployment compensation.
How the CARES Act Affects Unemployment Benefits
After federal lawmakers passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), unemployment benefits were expanded significantly. The Pandemic Unemployment Assistance provision allows many self-employed workers to receive unemployment benefits who normally wouldn’t, including sole proprietors, independent contractors, and gig workers.
The CARES Act also extends unemployment benefits for 13 weeks (to a maximum of 39 weeks of benefits) and provides an additional $600 a week in compensation.
Small business owners qualify for unemployment in the same way that other individuals do through the CARES Act. In short, you must be out of work due to direct COVID-19 impacts such as required business closure. You can apply for unemployment benefits with your state. Note that some states will require you to apply and be rejected for the typical unemployment benefits before you can apply for pandemic unemployment assistance.
Learn more in FindLaw’s Unemployment Insurance and COVID-19 section.
How Unemployment Benefits Usually Work
While each state runs its unemployment benefit programs a little differently, there is one general rule to unemployment for small business owners: If you pay in, you get paid.
So, if your small business has paid unemployment taxes on your salary, you probably qualify 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 biz was a sole proprietorship, you may not have been drawing a regular paycheck, as many sole proprietors and partners opt instead to cover living expenses out of the company’s profits. If you haven’t been contributing to your state’s unemployment insurance fund, you’re probably not eligible for those benefits (in normal times) if your small business shuts down. But shareholders and owners in S corporations or limited liability companies (LLCs) may often take home regular salaries and can opt-in to their state’s unemployment program, granting them benefits if the business runs into hard times.
Don’t Forget About the Other Requirements
Unemployment taxes, however, aren’t the only requirement for unemployment benefit eligibility. Just like terminated employees, out-of-work entrepreneurs seeking unemployment must also meet the same criteria to qualify for unemployment. They must be ready and willing to work and unable to find comparable employment. And there may be additional factors depending on which state you live in.
On top of that, some states have strict prohibitions on collecting employment if you’ve fired yourself. So not only may it be difficult to prove that you’re unable to find a job after you just shuttered your business, it may not do you any good.
So before you shut up shop and file for unemployment, check with an experienced employment law attorney first. If your business has run into financial trouble because of the coronavirus pandemic, also make sure to check other financial resources that may be available to you through your state and the U.S. Small Business Administration.