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Unemployment Benefits for Self-Employed: There Is a Way

June 29, 2015
Small Business
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By Brock Andersen

Learn more about Brock on NerdWallet’s Ask an Advisor

If you’ve ever searched online for information about self-employment or working as an independent contractor, you’ve probably seen someone mention all the benefits that employees enjoy but that you would be missing out on. What most people don’t know, however, is that if you structure your business properly, you can take advantage of many of the same benefits a W-2 employee gets when working for someone else, while still enjoying the freedom, independence and self-determination that makes working for yourself so rewarding.

A primary fear many people have about self-employment is what happens if business goes poorly and they can’t make ends meet. W-2 employees who get laid off have the protection of unemployment benefits, which provide at least some income while they look for another job. Ideally, you won’t ever need to fall back on unemployment, but it would be nice to know you had the option. Is there any way the self-employed can benefit from the unemployment insurance system like their W-2 counterparts?

If you’re operating as a sole proprietor, the answer is no. However, if you structure your business as an S corporation and put yourself on the payroll as a salaried employee, you’ll be eligible for unemployment in most states, though not all. Depending on where you live, then, you may be able to hedge some of the risk you take on as a entrepreneur.

The U.S. unemployment benefits system is a federal-state hybrid. The federal government sets the basic requirements of the system, but each state sets its own specific rules on who is eligible for coverage, how much they can receive in benefits and so on. The system is funded by federal and state unemployment taxes paid by employers. (Three states — Alaska, New Jersey and Pennsylvania — also tax employees.)

What follows is a list of all 50 states and the District of Columbia that indicates:

  • Whether the state requires you to pay unemployment tax for yourself if you are an S corporation owner on the books as an employee.
  • Whether you are able to file for unemployment.

Most states will allow you to file, but a few have differing policies. For example, in Washington state, you don’t pay unemployment tax, so you aren’t eligible to collect. Then there’s New Mexico, which requires you to pay tax, but doesn’t allow you to collect unemployment.

It’s important to note that this list covers only state unemployment tax. Even if your state doesn’t require you to pay tax, you may still be required to pay federal unemployment tax. Paying federal tax by itself, however, does not make you eligible to collect unemployment. That’s a state-level decision.

State Am I required to pay
unemployment tax?
Can I “fire myself”
and collect unemployment?
Alabama Yes Yes
Alaska No** Yes
Arizona Yes Yes
Arkansas Yes Yes
California Yes Yes
Colorado Yes Yes
Connecticut Yes Yes
D.C. No No
Delaware Yes Yes
Florida Yes Yes
Georgia Yes Yes
Hawaii Yes Yes
Idaho Yes* Yes
Illinois Yes Yes
Indiana Yes No
Iowa Yes Yes
Kansas No** Yes
Kentucky Yes Yes
Louisiana Yes Yes
Maine Yes Yes
Maryland Yes Yes
Massachusetts Yes Yes
Michigan Yes Yes
Minnesota No** Yes
Mississippi Yes Yes
Missouri Yes Yes
Montana Yes Yes
Nebraska No No
Nevada Yes Yes
New Hamphshire Yes Yes
New Jersey Yes No
New Mexico Yes No
New York Yes Yes
North Carolina Yes Yes
North Dakota Yes* Yes
Ohio Yes Yes
Oklahoma Yes Yes
Oregon No** Yes
Pennsylvania Yes Yes
Rhode Island Yes No
South Carolina Yes Yes
South Dakota Yes Yes
Tennessee Yes Yes
Texas Yes Yes
Utah Yes Yes
Vermont Yes Yes
Virginia Yes Yes
Washington No No
West Virginia Yes Yes
Wisconsin Yes Yes
Wyoming Yes Yes

*Can opt out of paying unemployment tax.
**Can opt in to paying unemployment tax.

This list was compiled as of June 9, 2015. The answers may change as a result of states changing their policies. It is recommended that you consult with a tax professional before acting on any of the information provided.

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