Can You Start a Business While Collecting Unemployment?

Can You Start a Business While Collecting Unemployment?

How Starting a Business can Affect Your Unemployment Benefits

While job loss can be a devastating moment, it can also be an opportunity for many people to chase their entrepreneurial dreams. If you’re considering starting a business while collecting unemployment benefits, there are some things to consider before you begin. There may be unemployment requirements to keep in mind. And, for those who do take the leap in a down economy, sources of financing and consumer spending habits may be in flux. Having a solid plan that takes the economy into account is crucial. 

Can You Collect Unemployment and Start a Business at the Same Time?

The short answer is yes. You can start a business while collecting unemployment, but it can affect the amount of your weekly benefit.

Rules vary from state to state, so you’ll want to review yours. But overall, nothing prohibits someone from starting a business while collecting unemployment.

What will matter is income: Should your company start making money, you need to report that, and it could reduce your unemployment benefits.

Self-Employment Assistance (SEA) Programs 

A few states offer self-employment assistance (SEA), a program specifically designed to help people who are unemployed, build their own business during that time: 

• New Hampshire 
• New York 
• Oregon 
• Washington 

States with SEA programs pay a self-employment benefit instead of regular unemployment insurance to help entrepreneurs as they establish their new businesses. The programs waive the work-search requirements to allow the participants to engage in full-time entrepreneurial activities. 

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 the sole owner who only takes money from the business as you need it, it’s you’re not an employee. 

This situation may extend 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 are 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. 

Employer-employee relationship 

Do you have a title like CEO, general manager, or president? Does that title come with a defined set of responsibilities? Do you play 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. 

Wages 

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 may 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 are not an employee entitled to 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 right to unemployment benefits. 

Unemployment taxes 

As a business owner, you’re accustomed to the taxes you pay to both state and federal governments. 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 do not need to think twice before applying for unemployment. 

States fund their unemployment programs through self-reported company taxes. These taxes both fund the program and allow states to calculate benefit amounts for unemployed people. 

Some organizations are exempt from unemployment taxes. Generally, exemptions are restricted to nonprofits, religious organizations, educational institutions, and government employers. 

Loss of employment 

If you must close your business because of the coronavirus, you may also lose your employee status. The 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.