Can an LLC Owner Collect Unemployment?
Whether or not an LLC owner can claim unemployment will ultimately depend on how their LLC is structured for tax purposes.
Our Can an LLC Owner Collect Unemployment guide examines an owner’s unemployment eligibility, how to file for unemployment, and what to do if a business owner does not qualify for unemployment.
Recommended: Use our How Do I Pay Myself in an LLC guide to learn how owners can pay themselves according to each tax structure.
LLC Owner Unemployment Eligibility Requirements
For an LLC owner to qualify for unemployment, they must meet certain requirements. These include:
- The LLC must be a qualified employer that pays into federal and state unemployment tax programs.
- Owners must be employed by the company as a W-2 employee and must have filed federal taxes as an employee of the company. LLCs taxed as C corporations (C corp) or S corporations (S corp) are able to pay owners as employees.
- The owner must have worked for the company for a sustained period of time, depending on the state. (Normally unemployment is calculated from the first four quarters of the last five to determine eligibility and the amount to be paid.)
- Owners must prove that they are actively seeking employment (including posting on job boards and applying for jobs) and must be available to work if called upon
- The owner must file taxes within their state of residence
- Owners must be eligible for unemployment insurance benefits under federal and state law
Note that by default, the IRS treats a single-member LLC as a disregarded entity (i.e., a sole proprietorship) and a multi-member LLC as a partnership. LLC owners with this default pass-through tax structure typically pay themselves with a distribution or draw, not a salary.
Because of this, owners of LLCs with the default tax structure are not considered employees and therefore cannot typically collect unemployment.
How to Apply for Unemployment as an LLC Business Owner
Applying for unemployment benefits as a business owner the process is fairly simple. You will need to complete an application form and submit it to your local state unemployment agency. Many states offer online unemployment filing, while other states offer mail, fax, email, and in-person filing options.
While the exact application process will vary by state, some typical application features include:
- Information about the business including its name, address, phone number, and any other relevant information.
- A list of all employees who were working at the time of filing.
- Payroll records showing how much was paid to each employee during the previous calendar year
- Copies of your federal and state tax returns
Recommended: To determine your state’s unemployment application process as well as whether you qualify for your state’s unemployment program, contact your local unemployment office.
How Long Do Unemployment Benefits Last for LLC Owners?
Unemployment benefits last up to 26 weeks. After this time, you may still be entitled to continue receiving benefits based on your past earnings. However, most people stop receiving benefits after 12 months.
Each state has different rules regarding unemployment. Check with your state’s local unemployment office to confirm your area’s benefit expiration dates.
What If You Don’t Qualify for Unemployment Benefits?
While collecting unemployment benefits is a good way to keep your financial situation stable, if you do not qualify for unemployment benefits as a small business owner, there are other ways that you can obtain funding.
Depending on your business credit, some alternative financing options for your business can include:
- Applying for a business credit card
- Taking out a home equity line of credit
- Getting a small business loan, such as traditional business term loans, microloans, or working capital loans
- Applying for an SBA Small Business Loan, such as 7(a) loans or disaster loans (if applicable),
- Applying form small business grants, either on a federal, state, local, or private level
- Setting up donation-based crowdfunding
Keep in mind that there are advantages and disadvantages to each of these options and that many of them will not provide long-term funding.
Frequently Asked Questions
Unemployment insurance provides temporary assistance to unemployed individuals. It helps them cover some of the costs associated with finding new employment.
Though unemployment insurance is a joint federal-state program, the benefits are paid out by the state government (typically on a weekly basis).
Unemployment tax is a joint program offered by the federal and state government that businesses pay into to maintain a state’s unemployment benefits.
Employees do not pay the unemployment tax; rather, the employer pays both federal unemployment (FUTA) and state unemployment based on the wages they pay their employees.
Unemployment programs are designed to help people who lose jobs through no fault of their own. They help job seekers keep food on the table until they find another job.
To qualify for unemployment programs, there are job search requirements and limitations to benefit amounts, not to mention unemployment laws that must be followed.
By default, the federal government treats LLCs as disregarded entities (single-member LLCs) or partnerships (multi-member LLCs) for tax purposes. This means that the LLC’s profits and losses are “passed through” to the owners’ individual tax returns.
LLCs can also elect to be treated as a C or S corporation for tax purposes.
Yes and no. Every member of a limited liability company must file a personal income tax return that records their business profits and losses, but LLCs with the default tax status do not have to pay corporate income tax. Likewise, S corporation owners only pay income taxes on their distributions.
Owners of LLCs taxed as a C corporation must pay income taxes at both the entity level (business income) and at the individual level (dividends).
For more information, check out our guide to filing LLC taxes.
No. Sole proprietors are not eligible for unemployment benefits because they are not considered employees of their business. They do not pay unemployment taxes as part of their self-employment tax.
If a shareholder is considered an employee in their corporation, then they can collect unemployment benefits.
There are no restrictions on collecting unemployment while starting a business, so long as you meet your state’s work-search requirements (i.e., the amount of time you spend actively looking for employment).
Keep in mind that any income you produce from your new business during that time must be reported and may affect your benefits. Check with your state unemployment office to find out your state’s reporting requirements.
Whether business owners can make unemployment claims will depend on whether the owner is treated as an employee. Sole proprietors, partnership owners, and some LLC owners are unable to receive unemployment benefits.
Self-employed individuals, including freelancers and independent contractors, are typically not considered employees and therefore do not traditionally qualify for unemployment.
Yes. If you’re self-employed, you can collect unemployment even if you run a second job or start a side business.
It depends. You may be able to collect partial unemployment if you lose one of two jobs or start a side business while unemployed. However, keep in mind that any income you make while on unemployment must be reported to the state.
Check with your local unemployment office to determine your state’s benefit eligibility requirements.
Yes. Unemployment benefits are considered income and are therefore subject to both federal and state taxes.