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Gaining Unemployment Benefits when Self-employed

Aparna Iyer Sep 29, 2018
Being self-employed can be a rewarding experience. However, there are a few disadvantages of self-employment, especially in matters of unemployment benefits.
The Federal-State Unemployment Insurance Program provides unemployment benefits to workers, who have sufficient work and wages in covered employment and meet other eligibility requirements as prescribed by State law, provided the workers have been rendered unemployed due to no fault of theirs.
Covered employment refers to work that comes under the purview of the Employment Security Law and on which taxes that fund unemployment insurance have to be paid, and reports have to be filed when the wage liability criterion is met.
In all but three states, unemployment insurance is funded solely by a tax that is imposed upon employers. Since unemployment benefits are funded entirely by the employer, one wonders if 'self-employed unemployment benefits' is a myth.

Do Unemployment Benefits for the Self-employed Exist?

Business Incorporated as S-Corp or C-Corp

If the self-employed person's business is incorporated as a S-Corp, the entrepreneur's salary is subject to self-employment tax although the shareholders' distributions are not subject to employment tax. In other words, the self-employed has effectively paid into the state's unemployment insurance fund and is thus eligible for unemployment benefits.
A S-Corp is typically preferred for companies with 75 or fewer shareholders and confers upon the business the benefits of incorporation although it is taxed as if it were a partnership. Since the business is not taxed at the entity level, there is no problem of double taxation.
A self-employed person whose business is incorporated as a C-Corp is also eligible for unemployment benefits since the entrepreneur's salary is subject to self-employment tax. Double taxation is the main disadvantage of a C-Corp since the income is taxed at the corporate level and then again on distributing it to the shareholders in the form of dividends.

Unemployed on Account of Disaster

People who have been rendered unemployed on account of an event that has been declared as a major disaster by the President of the United States, are entitled to receive disaster unemployment assistance provided they are not eligible for regular unemployment insurance benefits.

Paid Unemployment Taxes

Self-employed people, who have registered with the state authorities and have volunteered to pay unemployment taxes, are entitled to receive unemployment benefits since they have contributed to the state's unemployment insurance fund.

Filing for Unemployment Benefits If Self-employed

It is advisable to contact the State Unemployment Insurance agency soon after being rendered unemployed. People who are eligible to collect unemployment benefits should file their claims in accordance with the state's instructions regarding the same.
In case of disasters, the victim is expected to file claims in accordance with announcements regarding the availability of Disaster Unemployment Assistance. Again, the State Unemployment Insurance agency may be contacted for further details with regards to applying for unemployment benefits.

How Long can a Self-employed Person gain Unemployment Benefits

Typically, unemployment benefits are paid for a maximum of 26 weeks in most states. Disaster Unemployment Assistance is again available to victims starting with the first week of unemployment and continuing up to a period of 26 weeks provided the catastrophic event was declared as a disaster by the President.
The mentioned benefits may be extended for an additional period of time if deemed necessary.
Hopefully, the discussion has dealt with the question, 'can I apply for unemployment if I am self-employed?'. Since unemployment benefits are harder to come by, self-employed individuals may benefit by purchasing private unemployment insurance that may come in handy during times of distress.