Can Small Business Owners File For Unemployment?

Hourly employees all over the country are claiming unemployment compensation due to the devastating effects of COVID-19. But what about the employers who are forced to close their doors? Can small business owners file for unemployment as well?

In a fully functioning economy, the answer would hinge on two factors: if you receive a regular salary, and if you pay unemployment taxes.

However, the coronavirus pandemic sparked a new normal in the unemployment arena for the time being—specifically through the CARES Act. As a result of the legislation, more self-employed business owners are now eligible for unemployment benefits.

There are still a few factors that go into collecting unemployment benefits under the new guidelines. Let’s break down what those guidelines are, as well as how to apply if you are in fact eligible to do so.

{{banner-cta}}

Can Small Business Owners File for Unemployment?

Yes, unemployment for small business owners is now possible if you have lost income or are unable to work due to COVID-19. However,  like the rules of many other government programs, unemployment guidelines are different due to the coronavirus pandemic.

Under normal circumstances

A business owner who has to close their doors due to the virus would not be eligible for unemployment since they are considered “self-employed.”

Typically, paid unemployment is reserved for employees and is not available to sole proprietors.

A sole proprietorship—the most common way to start a business—is an unincorporated business operated by one person with no distinction between that person and the business. This also is typically the case for partnership-owned businesses and LLCs.

If you own your business but also work as a wage-earning employee with a W-2 and not a 1099, paid unemployment taxes (both federal tax rate and state tax rate), and lost your employee status but can also prove you are actively looking for new employment, you could be eligible under normal unemployment rules.

To further explain, you’d need to have a defined role with its own set of responsibilities—think president, CEO, or COO. In order to qualify for unemployment benefits, you normally would have to show that you perform that role on a regular basis.

Changes to unemployment rules

As mentioned before, the federal Department of Labor expanded eligibility under the CARES Act.

Under this expansion, self-employed individuals who would otherwise be unqualified—including sole proprietors, LLCs, independent contractors, and gig workers—are now eligible to file an unemployment insurance claim. So as we already said unemployment for business owners is now possible if you have lost income or are unable to work due to COVID-19.

State unemployment insurance program guidelines typically require individuals to actively seek work to receive unemployment benefits each week, but there is flexibility on this factor under the CARES Act. This is because the department using this act to determine eligibility has recognized that it is difficult to actively seek work when there are no jobs to be found.

Under this act, you are not eligible for unemployment under the extended benefits if:

• You have the ability to run your business remotely
• Your business closed for reasons other than COVID-19
• You find new employment

What Kind of Unemployment Benefits can I Expect to Receive?

Just as COVID-19 changed the unemployment rules for business owners, the actual benefits changed slightly as well.

Under normal circumstances

Each state has its own sets of guidelines and the benefit amounts you can receive vary.

Be sure to check with your state unemployment insurance office—you can do so by visiting the U.S. DOL Unemployment Insurance Relief During COVID-19 Outbreak page. The amounts range anywhere from $40 to $450 a week, depending on your earnings and state.

When you file a claim, your claim manager will tell you exactly how much money you will receive throughout your unemployment term. This claim will last a year and you won’t be able to file another claim until the first one expires.

Pandemic Unemployment Assistance program

Under the Pandemic Unemployment Assistance program stipulated in the CARES Act, states can extend the amount of time you can receive weekly benefits for 13 weeks to a maximum of 39 weeks.

Note: The PUA also provided an extra $600 a week in compensation. However, this weekly benefit expired on July 31, 2020. Congress is currently working on new legislation regarding further benefits. We will update this article with the newest information as soon as legislators reach a deal.

How do I Apply for Unemployment Benefits?

Once you determine you’re eligible to receive unemployment benefits, you’ll apply directly with your state office. The federal government does not process unemployment claims. Your state will send you two forms: one that you complete as an employee and one that you will fill out for your business.

Different states require different items for the application process. Still, you should gather the following documents to get started:

• Last year’s paystubs
• Business and personal tax returns
• Your Employer Identification Number
  

Applying for unemployment benefits as a business owner involves several steps, including providing necessary documentation like proof of income and employment history.
It’s important to understand the nuances of state-specific policies. For instance, in Tennessee, employers must complete specific forms and may be liable for unemployment insurance premiums based on various criteria

Real-life Success Stories

Throughout the pandemic, many small business owners have successfully navigated the unemployment benefits system.

For example, the Pandemic Unemployment Assistance (PUA) program expanded eligibility to a broader array of workers, including those who were self-employed, with 41 percent of eligible claimants being self-employed in 2020 and 49 percent in 2021.
These stories of success can provide practical insights and encouragement for others in similar situations.

State Policy Comparison

Unemployment benefits vary by state, with some offering more favorable policies for small business owners.
For example, the basic program in most states provides up to 26 weeks of benefits, replacing about half of the previous wages.
However, some states offer fewer or more weeks of benefits, and the amount of benefits can vary, with some states providing around $200

Economic Impact Analysis

The extension of unemployment benefits to business owners has broader implications for local economies and sectors hit hard by the pandemic. High unemployment rates can lead to lower consumer spending, which in turn affects small businesses.

Do I Have Other Options?

Consider utilizing the variety of funding options available to help your business before closing your doors and seeking unemployment.These include the Paycheck Protection Program (the deadline to apply is August 8, 2020), the SBA Economic Injury Disaster Loan, and many grant programs you can check out.

Visit the Homebase COVID-19 Resource Center to find more financial assistance options available to you.