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When you own your own business, you take on a lot of risk from the start, including: "What happens if your business folds and your income ceases as a result?" Many business owners are having to face this situation in the wake of COVID-19, which begs the question: Can business owners file for unemployment?
The answer might be yes—but, as you might expect, there are several factors involved. Some of these details depend on the state in which you’re filing as well as your business entity structure. We’ll cover whether or not you can file for unemployment as a business owner as well as some alternatives to look into for financing if you’re not able to claim unemployment.
Can business owners file for unemployment?
The rules of unemployment for small business owners are dictated by the guidelines of the state in which you operate and are employed. While unemployment benefits are created specifically for employees, not business owners, you may be eligible if you’re an employee within your own business.
To explain, if you worked as a wage-earning employee of the company on a W-2 (not 1099), paid federal and state unemployment taxes, lost your status as an employee and can prove that you’re seeking alternative employment, then you might be eligible.
In order to claim unemployment as a business owner, you also need to have a title and role that comes with a defined set of responsibilities. An example would be president, CEO, COO, etc. Your role must be defined and you must perform it for the company you own in order to qualify.
Of course, not every business owner is set up as a W-2 employee who pays taxes on their earnings through a standard paycheck. Some businesses owners prefer to compensate themselves via dividends or distributions since they’re often taxed at the capital gains rate instead of incurring ordinary income taxes which are assessed at higher rates. However, that method wouldn't set you up to file for unemployment as a business owner.
Typically, sole proprietorships are not eligible for unemployment since they don’t pay unemployment taxes and aren’t a W-2 employee. This is often the case with LLCs and partnerships as well. However, new guidelines specific to COVID-19 (which we’ll get into below) may change that.
Unemployment changes due to COVID-19
The federal government’s Coronavirus Aid, Relief and Economic Security Act (CARES Act), created and enacted due to COVID-19, changed the conditions around self-employed individuals applying for unemployment benefits. This includes new eligibility for sole proprietors, LLCs, independent contractors and gig workers who weren’t ordinally eligible due to how they’re paid and the fact that they don’t pay unemployment taxes. And while guidelines to continue to receive unemployment each week typically include actively looking for work, they are currently looser due to the difficulty for many to do so.
Additionally, if you don’t qualify for regular unemployment benefits, you may be eligible for federal Pandemic Unemployment Assistance under the CARES Act. This would allow business owners to collect unemployment if your business temporarily closed due to COVID-19, if you’ve temporarily had to stop working due to a high risk of exposure, if you’ve had to care for a sick family member, or if you’re temporarily quarantined due to contracting coronavirus or being required to isolate—among other reasons.
This modified unemployment assistance program provides benefits that last longer than standard unemployment for those who are eligible. The duration of unemployment benefits depends on each state; however, if you qualify for Pandemic Unemployment Assistance, these benefits can last for a total of 39 weeks (including any time you received regular unemployment benefits). Self-employed small businesses owners are also eligible for an additional $600 per week in addition to their state-specific unemployment benefits, as stated in the CARES Act—however, this extra $600 benefit was set to expire on July 31, 2020.
Not everyone is universally eligible for unemployment benefits under the CARES Act, however. If you are a small business that has closed for reasons unrelated to coronavirus or you’re currently receiving sick leave or family leave, you won’t be able to receive unemployment benefits as well.
As you’ll expect, one’s eligibility for unemployment benefits due to disruption from COVID-19 will vary depending on the policies of the state in which you’re operating. It’s important to contact your state to find out their guidelines and whether you qualify for unemployment benefits as a business owner, especially amid the pandemic.
How to apply for unemployment as a business owner
The first foundational element of applying for unemployment as a business owner is confirming that you’re eligible to work and actively looking to be employed again (including through your own business). You’ll apply directly through your state—unemployment is processed on a state-by-state basis and not through the federal government.
As a result, requirements for application and approval will vary by state, but it will be helpful to pull the following documents:
Your pay stubs for the last year.
Your tax returns, both business and personal.
You’ll have to complete a form provided by the state as an employee as well as a form that’s sent to the business; you’re responsible for filling out both of these as a business owner.
What kind of unemployment benefits can I Expect?
If you’re approved for unemployment benefits as a business owner, you’ll receive the benefits available in your state. It’s very important to note that these benefits vary significantly among states; the majority of states will only provide benefits between roughly three and six months.
In terms of the amount of unemployment benefit you’ll receive if you file for unemployment as a business owner, there’s a big range, which is based on your earnings. You can generally expect to receive between $40 and $450 a week. The claim manager you work with within your state will be able to let you know exactly how much you’ll receive on unemployment.
As mentioned above, you may currently be eligible for an additional $600 per week due to the CARES Act. Again, this benefit was to expire on July 31, 2020.
Your unemployment claim will last a year, which means that you can’t file another claim until this one expires.
Alternatives to unemployment benefits for business owners
If you don’t qualify for unemployment benefits as a business owner, it can be a tough hit, especially when you’re in financial trouble from the closure of your business. Although they’re different in nature, there are some alternatives to consider that may help you float your business in the interim.
SBA disaster loans
SBA disaster loans are a funding source for business owners that have been affected by a major disaster, such as the coronavirus pandemic or a natural disaster. There are several different types of SBA disaster loans, including:
Home and personal property disaster loans.
Business physical disaster loans.
Economic Injury Disaster Loans (EIDL).
Military Reservists Economic Injury Disaster Loans (MREIDL).
Express Bridge Loan Pilot Program.
There are specific conditions for each SBA loan that business owners must meet in order to qualify. This includes the type of injury to the business or the situation in which the owner can’t meet their business expenses. They can provide capital into the millions and have very favorable repayment terms and low interest rates.
With the exception of the Express Bridge Loan program, this is the only situation in which the SBA provides funds directly to business owners (normally, the SBA only guarantees loans, which are provided by partner banks and organizations).
Paycheck Protection Program
The federal government also created the Paycheck Protection Program in the wake of COVID-19 to help small business owners cover payroll and other essential costs of running their businesses. Plus, depending on what they use the funds for—at least 60% on payroll costs—small business owners could have these loans forgiven, meaning it’s essentially free money for their business.
The Paycheck Protection Program is also available for self-employed individuals and independent contractors, which could make this a viable alternative for small business owners to cover their own income losses.
Other sources of funding during unemployment
If neither SBA disaster loans nor the Paycheck Protection Program are right for you, consider these other funding options to use in lieu of unemployment benefits.
SBA 7(a) loans.
Your business insurance policies.
Withdrawing from your retirement account.
There are pros and cons to all these options and most are not meant to provide a long-term solution to a financial crisis. However, if you are unable to qualify for unemployment, they are worth considering.
The bottom line
Whether or not you can file for unemployment as a business owner depends on several factors. However, there are a few exceptions to the standard rules that have been implemented in response to the coronavirus pandemic. The best thing to do is check in with your state since benefits are administered at the state level. Unemployment representatives can give you the specific details for your situation. Keep in mind that you have alternative funding options to explore, as well.
This article originally appeared on Fundera, a subsidiary of NerdWallet.