5 Things to Know About Unemployment for the Self-Employed

by Emily Guy Birken · 7 comments

One of the pitfalls of being self-employed is what happens if you lose your business through no fault of your own. If you worked in a traditional job, you’d know what to do next: apply for benefits at the local unemployment office. But things are trickier when the job you lost was your own business. However, it is still possible for you to qualify for assistance as you move on to the next chapter in your life:

1. Be careful if you incorporate. If you collect a salary from your incorporated business, then you have been paying self-employment tax. Ditto for sole proprietors and partnerships. This means you made contributions to your state unemployment insurance fund, and you are eligible for benefits if you lose your business. On the other hand, some small business owners have been trying to avoid the self employment taxes by not paying themselves a salary. If this is the case, then don’t be surprised that you are denied if you apply for unemployment relief.

Incorporating your company has other benefits like separating your personal tax liability from that of your business. It also protects the owner of a business from any personal financial liability if the corporation needs to declare bankruptcy. Incorporation is one way to protect yourself from the ups and downs of self-employment, but avoiding taxes isn’t one of them.

2. Disaster unemployment assistance. If you are unable to work because of a natural disaster, you may apply for disaster unemployment assistance. The president must declare a major disaster in the area where you live or work in order for you to be eligible. The benefits will last up to 26 weeks after the disaster has been declared.

3. Benefits for contractors. If you are a contract employee in California or Oregon, don’t assume that you have no recourse if your job dries up. According to the courts in these two states, contractors who had been in a long-term position at a company were serving a similar function to at-will employees, and therefore they should be treated like their at-will cubicle-mates.

4. Get help moving on. While this is not a cash unemployment benefit, Career One Stop Centers are agencies throughout the country that can help you to find your next job. These centers were created through a collaboration between individual states and various local agencies to help provide concrete aid to those looking for work. These centers offer internet access, telephones, fax machines, and career workshops. They can help any unemployed entrepreneur figure out where to go next.

5. Self-employment assistance if you’re unemployed and starting a new business. On the other side of the unemployment coin are those employees who have been laid off from a traditional job, and are looking to start a business. This assistance will provide budding small business owners with a weekly allowance while they are doing the work necessary to get their new venture up and running. This is different from traditional unemployment insurance because you can be eligible even if you are working full time trying to get your business started. This allows a new small-business owner a little breathing room before the venture becomes lucrative.

As of right now, this program is only available in seven states: Delaware, Maine, Maryland, New Jersey, New York, Oregon, and Pennsylvania.

While the unemployment benefits available to a self-employed worker are not as extensive as those offered to traditional workers, there are still some safety nets in place.

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{ 7 comments… read them below or add one }

Money Infant March 23, 2012 at 6:42 am

I really need to incorporate my online business and protect myself better. Of course I’m living in Thailand so it won’t help me one bit with unemployment even though I still pay the taxes.

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Marbella March 25, 2012 at 2:19 am

I have been self-employed all my life and the key is to always save money and not working for a major customer, but have many customers in case someone goes bankrupt.

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Thad P March 26, 2012 at 12:13 pm

This is an important list. Self-employed people usually know about benefit related issues (like being in the individual pool for health insurance), but they may miss the other matters you raise..

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Financial Advice for Young Professionals March 26, 2012 at 3:41 pm

How do you not pay yourself a salary?

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MoneyNing March 26, 2012 at 3:52 pm

Since you own your company, you can, in theory, decide to not pay yourself a salary. However, the IRS recognizes that you can reduce your overall tax burden this way so you need to have a reasonable case for choosing your salary figure if they question it.

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Sara November 15, 2012 at 9:42 am

My husband is part owner of an S corp and collecting a salary with the same deductions as other employees. Can he be temporarily laid off and collect unemployment benefits?

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Linda July 10, 2013 at 10:55 am

My husband and I were co-owners of a small landscaping business. Neither of us have ever drawn a salary from the business. My husband recently had to go on permanent disability so the business is now in my name only. In addition I had been working a full-time job and recently lost my job due to downsizing and I have been collecting unemployment. Is this ok to do or do I need to claim the business even though I have never received a paycheck from this business?

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