The coronavirus has small business owners across the country scrambling to keep their businesses afloat. And if you’ve had to shut your doors, you may be asking yourself: Can I file for unemployment?
Eligibility for unemployment benefits depends on several factors, including your state and employment status within your business. But generally, small business owners can file for unemployment if:
- They worked as a wage-earning employee of the company.
- They paid federal and state unemployment taxes.
- They lost their employee status.
- They’re genuinely seeking alternative employment.
Wage-earning employee status
Not all business owners are employees. If you are a sole proprietor who only takes money from the business as you need it, it’s likely you’re not an employee.
This situation mayextend to corporations, LLCs, partnerships. Corporate owners (shareholders), LLC owners (members), and partnership owners (partners) aren’t necessarily employees. In each of these cases, if business owners only take money from the company through distributions or dividends, they’re not employees.
Under federal and state laws, unemployment benefits are intended for employees, not business owners. But you can be both. Requirements vary by state, but if you perform work under an employer-employee relationship or earn wages, you may qualify for unemployment.
Do you have a title like CEO, general manager, or president? Does that title come with a defined set of responsibilities? Do you perform your role under this title for the benefit of the company you own?
If you answered yes to these questions, you’ve met the first of two requirements to be considered an employee under unemployment laws. If you answered no to these questions, you might not be an employee. If a business owner doesn’t have a title and doesn’t participate in daily business operations, they’re a “passive” business owner. Passive business owners don’t qualify for unemployment benefits.
If you are a wage-earning employee of the business you own, you may be able to apply for unemployment benefits. But first, ask yourself these questions: Do you receive a paycheck from your company? And does that paycheck deduct state and federal taxes and any other pre-tax benefits automatically?
If you answered yes to these questions, you’ve met the second of two requirements to be considered an employee under unemployment laws. If you answered no to these questions, you likely receive money from your business in the form of distributions or dividends.
Many business owners prefer compensation through these mechanisms because, usually, they are taxed at the capital gains rate instead of ordinary income. While the lower tax rate is nice, if this is your only compensation, you aren’t an employee eligible for unemployment benefits.
Distributions and dividends alone don’t disqualify you as an employee under unemployment laws. But if you take distributions and dividends, you must also draw a regular employee wage to maintain your eligibility for unemployment benefits.
As a business owner, you’re accustomed to the taxes you pay to both state and federal governments. Take a look at those tax records. Do you pay both state and federal unemployment (FUTA) taxes?
With few exceptions, your business is required to pay both state and federal unemployment taxes on all employees. Failure to pay unemployment taxes doesn’t necessarily affect your ability to collect unemployment benefits. But small business owners who don’t should think twice before applying for unemployment.
States fund their unemployment programs through self-reported company taxes. These taxes both fund the program and enable states to calculate benefit amounts for unemployed individuals.
Some organizations are exempt from unemployment taxes. Generally, exemptions are limited to nonprofits, religious organizations, educational institutions, and government employers.
Loss of employment
If you have to close your business because of the coronavirus, you may also lose your employee status. Loss of employment is the easiest element to demonstrate in an unemployment claim. But your benefits may be limited, depending on how you lost your job.
Typically, former employees are eligible for unemployment benefits if they lost their job by no fault of their own. If you lose your job for any of the following reasons, you can still be eligible for unemployment:
- You were laid off.
- You were fired for non-misconduct related reasons.
- You quit voluntarily, with good cause.
- You were fired due to a labor dispute.
- You lost your job due to forces outside of your control, such as the coronavirus.
Genuinely looking for employment
To qualify for unemployment benefits, you must be ready, willing, and able to work while you’re receiving benefits. To demonstrate this, file weekly claims indicating you are actively seeking work and register for work at a state unemployment office. If you are unable to work, you may have options under disability or leave laws.
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