Can Small Business Owners Collect Unemployment? Let’s Break It Down

Published at

December 28, 2024

Finentries

Ah, unemployment—a safety net for the working class, but what about the entrepreneurs of the world? Can small business owners, the captains of their own (sometimes rocky) ships, qualify for unemployment benefits? The answer is: it depends. Let’s dive into this not-so-dry topic, with a touch of wit and an example to keep things grounded.

Business Structures Matter Here’s where things get interesting. Your business structure determines if you’re considered an “employee” or not.

Sole Proprietors If you’re a sole proprietor, the bad news is that you likely cannot collect unemployment. You and your business are considered one entity, so you’re not technically an employee.
LLCs and Partnerships In most cases, LLC members and partners don’t qualify for unemployment unless they’ve set themselves up as employees and paid into unemployment insurance.
Corporations (S-Corp or C-Corp) If you’re the owner of an S-Corp or C-Corp and you’ve been paying yourself a salary as a W-2 employee, then congratulations! You may qualify for unemployment benefits if you lose your job at your own company.

Let’s Meet the Smiths

To make sense of this, let’s take a closer look at a hypothetical couple: Emma and Jack Smith. The Smiths own a quaint coffee shop in their hometown, aptly named Smith’s Brews.

The Business Structure: Smith’s Brews is set up as an S-Corp. Emma and Jack are both on the payroll as W-2 employees, with Emma managing operations and Jack taking charge of marketing.
The Problem: A new corporate coffee chain moves into town, causing Smith’s Brews to lose significant business. Eventually, they’re forced to close shop.
The Question: Can Emma and Jack collect unemployment?

If you’re on your business payroll as a W-2 employee and paying into unemployment insurance, you may qualify for benefits—even if you’re the boss! Always plan ahead to secure your safety net.

How the Smiths Can Qualify

Since Emma and Jack were on the payroll and contributed to unemployment insurance through their salaries, they can file for unemployment benefits in their state. The process looks something like this:

Check State-Specific Eligibility: Each state has its own rules. They’ll need to prove they were laid off and that they actively contributed to unemployment insurance.
Provide Documentation: Pay stubs, tax filings, and proof of the business closure will be necessary.
Meet Job Search Requirements: Like everyone else collecting unemployment, Emma and Jack must actively look for work while receiving benefits.

The Curveballs

Not every small business owner gets off as easily as the Smiths. Here are some complicating factors:

Pandemic Relief: During the COVID-19 pandemic, programs like the Pandemic Unemployment Assistance (PUA) opened the door for sole proprietors and gig workers to qualify for unemployment benefits. While these programs have ended, they set a precedent for future crises.
Mixed Income: If you have both W-2 income (as an employee somewhere else) and 1099 income (as a self-employed individual), you may still qualify for partial benefits.
State Variability: States like New York and California have more robust systems for self-employed individuals than others.

What If You Don’t Qualify?

If you’re a small business owner who doesn’t qualify for unemployment, don’t despair. There are other options to keep you afloat:

Disaster Assistance Loans: The Small Business Administration (SBA) often steps in with low-interest loans during tough times.
Pivot Your Business: Think about new revenue streams. Can you turn that coffee shop into a coffee subscription service?
Freelancing and Gigs: Use your skills to find short-term projects on platforms like Upwork or Fiverr.

Be Proactive

If you’re a small business owner, it pays (literally) to think ahead. Consider setting up your business in a way that protects your future. If you’re not already paying yourself a salary, it might be worth doing so, even at a modest rate. Yes, it’s an extra expense, but it could save you from financial hardship if the business goes south.

In the end, unemployment benefits aren’t just for employees—they’re for anyone who meets the criteria. If you’ve built your business in a way that makes you eligible, take full advantage of the safety net. And if you’re not there yet, it’s never too late to plan for rainy days.

So, small business owners, the ball is in your court. Can you collect unemployment? Maybe yes, maybe no—but with the right structure and foresight, you can brew up a safety net that’s as comforting as a cup of Smith’s finest espresso. ☕