Are Small Business Owners Eligible for Unemployment?



Are small business owners eligible for unemployment? The answer to question of whether small business owners are eligible for unemployment is both “no” and “yes.” Read on to learn more:


From an accounting standpoint, a small business owner does not earn wages and therefore, no unemployment payroll deductions are taken for unemployment insurance taxes. In this case the answer to the question is “no.”


The answer to the question may be “yes,” if the business owner terminates his business in order to be eligible for unemployment. A determining factor is how the owner is listed in the general accounting function. Sole proprietors, for example, do not pay any unemployment insurance taxes.


How May Business Owners Become Eligible for Unemployment Benefits?

Many owners of small businesses choose to include themselves as employees of their companies and pay themselves regular salaries and benefits from which unemployment taxes are deducted every pay period.


If the business is a one-person “S” Corporation, the owner may also be eligible for unemployment benefits. This assumes the business owner draws a regular salary and is also a business shareholder.


In an “S” corporation filing, a business owner receives full benefits of the company as an employee. However, in these types of businesses there are variables in state laws regarding paying taxes on income from business profits.


Paying vs. Not Paying a Business Owner

In many strategies owners of small businesses rely on to maintain a healthy business bottom line, the decision to draw a regular wage vs. not doing so depends on the individual business economic status.


Owners of small businesses, especially start ups and newly established businesses, find paying themselves a regular wage negatively impacts the profitability of their company. It would appear then the determination of whether or not to pay a business owner wages depends on the overall financial stability of the company.


In the framework of an accounting system, the owner of a business initially declares sole proprietorship or “S” corporation status. When starting a new business, this is a financial consideration that should be discussed with a financial expert.


Closing a Business to be Eligible for Unemployment

Note that the basis for closing the business that would grant eligibility for unemployment is determined by the “cause” for the business closure. The cause must be unrelated to the business owner. Thus, the owner of the business cannot make the decision to close it solely for the purpose of becoming eligible for unemployment. Business closures should be due to financial or other negative factors through no intent or control of the business owner. Most business owners find filing for business closures involve documentation of the reason for the closure and informing the IRS of the closure. This serves as proof the closing has validity.