Yes, S Corporation owners are eligible for unemployment insurance, however depending on some crucial factors. The IRS has officially stated that shareholders, who work for S corporations, even if the shareholder is the only owner or worker, are considered employees for purposes of the Federal Unemployment Tax Act.
It simply means that a shareholder can be on the payroll, and if he is, the S corporation is expected to pay unemployment insurance tax on his behalf. Theoretically, if you are on the S corporation’s payroll and unemployment insurance was paid on your behalf, you can apply for unemployment.
However, even though an S corporation owner /employee are technically eligible for unemployment, most tend not to scale through especially since States require unemployment-benefits recipients to be “actively seeking work.”
In recent years, courts have held that owners of S corporations, who keep the corporation viable, even though it has no revenue, are not actively seeking work because new work can come into the corporation at any time. It simply means that states often believe that S corporation owners will close down the business simply to wait out a poor business cycle.
So, to collect unemployment, you will have to prove to the state that the S corporation is no longer viable, and you are conducting a job search. However, with the outbreak of coronavirus, and new policies been created to provide more self-employed individuals with unemployment compensation.
After federal lawmakers passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), unemployment benefits were expanded significantly. The Pandemic Unemployment Assistance provision allows many self-employed workers to receive unemployment benefits that normally wouldn’t, including sole proprietors, independent contractors, and gig workers.
The CARES Act also extends unemployment benefits for 13 weeks (to a maximum of 39 weeks of benefits) and provides an additional $600 a week in compensation. Note that almost all S Corporation owners qualify for unemployment in the same way that other individuals do through the CARES Act. In short, you must be out of work due to direct COVID-19 impacts such as required business closure.
Notably, you can now apply for unemployment benefits with your state. Also have it in mind that some states will require you to apply and be rejected for the typical unemployment benefits before you can apply for pandemic unemployment assistance.
And although each state runs its unemployment benefit programs a little differently, there is one general rule to unemployment for business owners: If you pay in, you get paid. So, if your S Corporation business has paid unemployment taxes on your salary, you probably qualify for unemployment benefits.
Here’s why that could be a problem for some entrepreneurs and small business owners: depending on your corporate structure, you may not have been paid a normal salary.
But shareholders and owners in S corporations or limited liability companies (LLCs) may often take home regular salaries and can opt-in to their state’s unemployment program, granting them benefits if the business runs into hard times.
How to File for Unemployment Insurance in 7 Steps
To receive unemployment insurance benefits, you need to file a claim with the unemployment insurance program in the state where you worked. Depending on the state, claims may be filed in person, by telephone, or online.
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1. Provide the necessary info from your previous job
When you file, you’ll need to be ready to submit not only your own basic information — such as name, address, phone number, Social Security number and so on — but also you’ll need to prove your previous income to be eligible for the PUA program. As an S Corporation owner, this could be tricky if you’ve had irregular earnings.
Note that some states base benefits on the highest quarter of income, which may be lost when a worker only has a 1099 for the whole year for proof of income. However, you should come prepared with all of the ways that you know you have been paid to establish for yourself a good high quarter of earnings.
2. File your claim online
Although there are federal guidelines that govern unemployment eligibility, unemployment benefits are administered and paid out by your state. Howbeit, you are expected to file for unemployment with one of 50 state agencies, not the federal government.
When you file for unemployment, it’s referred to as filing a claim. To file an unemployment claim, you’ll have to call your state’s unemployment office, visit it in person or submit a claim online. That last option is almost certainly your best bet, if possible.
Note that the US Department of Labor sponsors a website with a list of the online filing options for every state. To start filing a claim, choose your state from the drop-down menu and look for the link under the section titled “To file a UI claim online.”
3. File during odd hours or on your assigned day
Note that states are jam packed with claims, so even when you’re filing online, don’t be surprised if you see an error screen during at least one point in the process. Consider applying either early or late in the day — or even in the middle of the night if you’re awake — in order to get your claim through the system.
Some states are also asking certain groups to apply on certain days, such as Hawaii, which is requesting that people whose last names start with A-G file on Mondays, H-O on Tuesdays and P-Z on Wednesdays. You’ll need to check with your state to find out its specific rules.
4. Budget for less than your old pay check
Aside the fact that each state has its own unemployment rules, each state also pays out a different amount for Unemployment.
In many states, you’ll get roughly half of what you earned at your job each week for up to 26 weeks. While some states have a different formula that’s less generous, so the overall average replacement rate is closer to 40%. And in some states, the benefits period can be as short as 12 weeks.
However, as part of the same CARES Act that expanded eligibility, Congress also added an additional 13 weeks of unemployment funding. So currently, depending on your state, you might be eligible for up to 39 weeks of unemployment benefits.
In addition, each state has a cap or maximum amount you can get, and that maximum amount varies significantly depending on where you live.
According to reports, the lowest is $235 in Mississippi, and the highest is in Massachusetts at $1,192, including additional dependent allowances. So if you were lucky enough to have a well-paying job, you’ll probably get a lot less than half of your previous salary each week from your unemployment claim.
- Pay income tax on your unemployment benefits
Note that you are expected to pay tax on your unemployment benefits, at least when it comes to your federal income tax return. Unemployment compensation is subject to income taxes, but is not subject to Social Security and Medicare taxes.
So unlike the $1,200 stimulus payment that many people are receiving, the federal government will tax your unemployment benefits, including the extra $600 a week that the same federal government is providing. Also note that thirty-four states fully tax unemployment benefits, and two states partially tax unemployment benefits.
You are expected to include any unemployment payments you received in 2023 on your income tax return when you file it by April 2022. If you’re concerned about owing tax on that money, you can elect to pay it as you go so you don’t get hit with a bill next year.
Have it in mind that many people find it easier to have taxes withheld from unemployment rather than make estimated tax payments. But having taxes withheld or making estimated tax payments are both ways you can minimize the risk of an unexpected balance due and potential penalties.
6. Look for work
If you’ve filed your claim, gotten it approved and start receiving unemployment benefits, there are additional rules that you are expected to meet with if you don’t want to lose your benefits before you get a new job. Most states require that people receiving unemployment benefits be not only willing to work, but actively looking for work.
This is becoming somewhat impossible right now, especially since so many states are currently waiving that requirement.
However, always remember that every state is different, and also the definitions of “actively looking for work” vary from state to state. So if you are not so sure if your state mandates you to be currently looking for work, or what you need to do to prove that you’re looking for work, double check its unemployment website to find out.
7. Reapply for the federal extension if necessary
Although the additional 13 weeks of unemployment benefits being offered under the CARES Act will start automatically in some states, other states may require that you apply separately for the extension. Note that you will need to read the notices your state sends you to determine if you need to complete an additional application, or your payments could end up being interrupted.
Just like terminated employees, out-of-work S Corporation Owners seeking unemployment are expected to also meet the same criteria to qualify for unemployment. They must be ready and willing to work and unable to find comparable employment.
And there may be additional factors depending on which state you live in. In addition, some states have strict prohibitions on collecting employment if you’ve fired yourself. So aside from being difficult to prove that you’re unable to find a job after you just shuttered your business, it may not do you any good.
Therefore, before you shut up shop and file for unemployment, check with an experienced employment law attorney first. If your business has run into financial trouble because of the coronavirus pandemic, make sure to check other financial resources that may be available to you through your state and the U.S. Small Business Administration.