If your small business hits a slump, due to a crisis, pandemic, or other unfortunate circumstance, any employees you let go will be able to file for unemployment benefits.
You may wonder, however, if the same applies to you: Can small business owners file for unemployment? Is your only option small business bankruptcy?
In some cases, small business owners may be able to file for unemployment. It just depends on how you’ve been paying yourself and whether you’ve paid into unemployment insurance.
How Do Unemployment Benefits Work?
When employees are laid off or let go from a company, they are typically entitled to temporarily receive a portion of their previous salary in the form of unemployment benefits. People who quit their jobs or were fired because of poor performance are generally not eligible.
Unemployment benefits vary from one state to another, but generally can last up to 26 weeks. To qualify, individuals must be ready and willing to work and unable to find comparable employment. There may be additional requirements depending on which state you live in.
Unemployment insurance is financed by taxes paid by employers.
Types of Business Owners Who Are Eligible for Unemployment
Whether or not a small business owner can file for unemployment will depend on what state they live in, how their business is set up, and how they pay themselves. Here are some general guidelines that can help you decide if you should apply for benefits.
1. Sole Proprietorships
If you are the sole proprietor of a business, you likely do not pay yourself wages and unemployment taxes. If that’s the case, you probably do not qualify for unemployment for small business owners.
2. S Corporations
If you operate as an S corporation, you may be required to pay yourself wages, as well as state unemployment insurance tax on those wages, just as you do any other employee. If so, you can likely qualify for unemployment benefits.
You may want to keep in mind, however, that generally a business owner has to cease business operations entirely in order to be eligible. This shows that you are, indeed, separated from the company. “Firing yourself” due to a slowdown in business is not likely to make you eligible for unemployment.
3. Business Owners Not Earning Wages
If you operate your business as a partnership (such as an LLC or LLP) or a corporation, but haven’t been drawing a regular paycheck or contributing to your state’s unemployment insurance fund, you are likely not eligible for unemployment benefits.
If you only take money from your company as you need it, or only take money through distributions or dividends, you’re generally not considered an employee unless you are also drawing regular employee wages.
Changing your status and making yourself a W-2 employee of your company shortly before shutting it down isn’t likely going to help your case either. Many states have rules about required minimum lengths of employment to qualify for benefits.
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Requirements for Small Business Owners Applying for Unemployment
Requirements for small business owners to qualify for unemployment are dictated by the state. Typically, however, a business owner will only be eligible for unemployment benefits if they are an employee within their own business.
This means that if you meet these requirements:
• You worked as a wage-earning employee of the company on a W-2 (not 1099)
• You had a title and a role with defined responsibilities (such as CEO or president)
• You paid federal and state unemployment taxes
• You lost your status as an employee
• You can prove that you’re seeking alternative employment
If you’ve been compensating yourself through dividends or distributions, rather than wages, or you’re a sole proprietor, you likely will not be eligible to file for unemployment as a business owner.
How Small Business Owners Can File for Unemployment
If you believe you qualify for unemployment benefits, you may want to start by visiting your state’s Employment Development Department (EDD) website to review requirements and to start the application process.
You’ll likely need to have certain documents on hand, such as your driver’s license, Social Security card, and/or passport, and need to submit certain information, such as details on your last employer (that’s your company), the last week you worked, and your total gross earnings for the last week you worked.
You may also need to provide information on any other employers you have had over the past 18 months, as well as your net income. Some states may require you to have an interview with a representative from the EDD.
Once approved, you may need to verify whether you have looked for work or worked at all during a given pay period so your unemployment benefits can be accurately calculated.
What Kinds of Unemployment Benefits Can Business Owners Expect?
If you’re eligible for unemployment benefits as a business owner and your claim is approved, you’ll receive the benefits available in your state. Benefits can typically last anywhere from three to six months.
The actual amount of weekly unemployment benefits you’ll receive as a business owner will depend on where you live and your prior earnings. The maximum weekly benefit amount can range from $215 to $900-plus depending on the state where you file.
Once your benefits run out, you generally cannot file another claim until a year after your original claim.
Other Small Business Financial Relief Options
If you don’t qualify for unemployment benefits, but still need a solution to cover a gap in income until business picks up, there are a number of small business funding options to consider.
SBA Disaster Loans
The COVID Economic Injury Disaster Loan (EIDL) offered by the U.S. Small Business Administration (SBA) is no longer available. However, the SBA continues to offer traditional EIDL loans for business owners that have been affected by a natural disaster, such as a flood, drought, or hurricane. You can learn more on the SBA’s website.
Other SBA Loans and Grants
In addition to the EIDL program, the SBA offers many other loans to small businesses, such as the 7(a) loan program. SBA loans tend to offer the largest loan amounts and have the lowest interest of all your options.
In addition, the SBA offers a small number of grants to small businesses that do not have to be repaid.
Small Business Loans
You may qualify for a traditional small business loan from a bank, credit union, or online lender. Some require higher credit scores, while others have less stringent requirements, though may offer less favorable terms. You may also be able to get a personal loan while unemployed.
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Emergency Funding Options
If your revenues and credit scores are down, you may be limited to applying for higher-interest options, like a merchant cash advance.
Even if you have to pay higher interest, an emergency business loan could ensure you have the money you need to pay yourself and your business expenses until you once again have a successful small business, especially if you don’t qualify for unemployment.
Business Insurance Policies
Business insurance helps protect your business’ financial assets should you face an unfortunate (and costly) event, such as a lawsuit, property damage, theft, loss of income, and employee injuries or illnesses. A general business owners policy (BOP) typically includes:
• General liability insurance
• Commercial property insurance
• Business interruption insurance (which helps you recover lost business income if your business is unable to open because of a problem such as a fire)
Crowdfunding
Crowdfunding is the use of small amounts of capital from a large number of individuals (a.k.a., the “crowd”) to finance your business. If you opt for reward-based crowdfunding, investors receive a reward for investing and you get to keep ownership of your business. To go this route, you typically have to create a campaign on a crowdfunding site that gets people excited about your business.
The Takeaway
Whether or not you can file for unemployment as a business owner generally depends on whether you get a regular paycheck from your company and pay unemployment taxes. It can be a good idea to check in with your state, since these benefits are administered at the state level. If you don’t qualify, there are other ways to help keep your business afloat during a slump.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
Can small business owners file for unemployment?
It depends. Generally, a business owner will only qualify for unemployment benefits if they have been paying themselves as a W-2 employee.
How can small business owners apply for unemployment?
If you think you may qualify for unemployment benefits as a small business owner, you can start by going to your state’s Employment Development Department (EDD) website to review requirements and to start the application process.
To apply, you will generally need your driver’s license, Social Security card or passport, details on your last employer (your company), the last week you worked, and total gross earnings for that week.
You may also need to provide information on any other employers you have had over the past 18 months, as well as your net income. In some states, you may need to have an interview with a representative from the EDD.
Are unemployment benefits for business owners different from employees?
No. If you qualify for unemployment benefits as a business owner, you will have access to the same unemployment benefits as any other eligible applicant in your state.
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