In general, you should be able to file for unemployeement if your business stops and you have paid both payroll and unemployeement taxes.
Your Question Answered: Can An LLC Owner Collect Unemployment Benefits?
No entrepreneur starts a business with dreams of failure. However, unforeseen circumstances sometimes crop up – like the COVID-19 pandemic, and because of these circumstances, businesses sometimes fail. If you own an LLC that has been hard hit by the effects of this pandemic, you may be wondering … Can a business owner file for and collect unemployment benefits?
In the post below, we will discuss and answer the question, “As the owner of an LLC, can I collect unemployment benefits?” Further, we will also discuss how you can collect unemployment benefits when starting your personal business.
How Does The Taxman (IRS) View LLCs?
Before we can fully and comprehensively answer the query on whether LLCs can collect unemployment benefits, we need to first gain an in-depth understanding of how the Internal Revenue Service (IRS) treats LLCs. As it is, the IRS treats LLCs as either of the following:
1. Multi-member LLC
If an LLC is owned by more than one individual, it is usually known as a multi-member LLC. If an LLC has multiple owners, it is usually treated by the IRS as a partnership.
2. Single-member LLC
If an LLC only has one member or owner, it is usually treated as a sole proprietorship by the IRS.
NOTE: In both of the following scenarios, the profits garnered by the LLC are usually attributed to the members and/or owner(s) of the company.
The members who are in the active management of either type of LLC usually pay a self-employment tax which is usually deducted from their share of profits in the company (whether the profit is distributed or not). The income tax deducted from the directors of an LLC usually covers a wide range of things including (but not limited to) Social Security payments and Medicare. However, this income tax does not cater for the unemployment tax payable to the Federal Government. The reason no unemployment tax is deducted from the directors of an LLC is that they are not usually considered as employees under the law.
What Makes The Tax Options For An LLC Highly Favorable?
What makes owning an LLC great – tax-wise – is that LLC owners can choose to either be taxed as an S or C corporation. Should you elect for your LLC to either be taxed as an S or C corporation, you will be considered by the IRS as an employee whose salary must be within what is considered a “reasonable wage.”
Simply put, should you elect that your LLC is taxed as a C or S corporation, it means that your income tax deductions will not only cover things such as Social Security payments and Medicare but also unemployment compensation.
That said, we can now move ahead to the main query that is meant to be addressed in this blog post … “As the owner of an LLC, can I collect unemployment benefits?”
Can You Collect Unemployment Benefits As An LLC owner?
Yes and No – It all depends on certain factors.
If you have not chosen for your company to either be taxed as an S or C or corporation, then the income tax deducted from your wages at the company do not cover federal unemployment insurance. What this means is that you will not be able to file for or receive unemployment benefits if you leave the company in question.
On the other hand, if you have elected for your company to be categorized as an S or C corporation, it means that the income tax deducted from your share of the LLC’s profits also cater for federal unemployment benefits. What this means is that you are viewed by the taxman as an employee and as such, you can file for and receive unemployment benefits should you ever leave the LLC.
Can You Collect Unemployment Benefits When Starting Your Own LLC?
The ensuing (and hopefully to be over soon) COVID pandemic wreaked havoc on the economic prospects of many businesses which in turn led to many employees being laid off. If the dark shadow of the pandemic led to you losing your job, you may have tried to get back on your feet by forming an LLC – a really good idea since LLCs have many benefits, key among them being the ability to boss yourself.
If you have your own LLC, you may be wondering … “Can I file for and receive unemployment benefits while running my own LLC?”
The answer to this question depends on two things …
1. The amount of profits that you receive from the LLC
Until you start seeing profits from the operations of your LLC, you can still file for and receive your full unemployment insurance benefits. However, once your LLC starts becoming profitable, the amount of unemployment benefits you can file for and receive will reduce in inverse proportion.
2. Your dedication to a company
Depending on the state where your LLC is based, you may either be required to show up for work on a full-time or part-time basis in order to be eligible for unemployment benefits. In some cases, to receive these benefits, you may be required to show that you have actually been looking for a job. This essentially means that if you work for an LLC on a part-time basis, have not received any profits from the LLC so far, and, are able to provide proof that you have been actively seeking a supplementary source of income, you are eligible to receive unemployment benefits.
NOTE: Unemployment Regulations Vary from State to State
The answer to the questions, “Can I file for and receive unemployment benefits if I run my own LLC?” & “Can I file for and receive unemployment benefits when starting an LLC?” will vary depending on the state where your business operates. Note that unemployment benefits are usually administered at the state level. This means that the rules on unemployment compensation may vary depending on your level of income among other factors. If you want to know if your business is eligible to receive unemployment benefits, we recommend that you check the pertinent compensation rules, regulations, and requirements applicable to businesses seeking unemployment benefits within your home state.
Can you own/manage an LLC and still collect unemployment benefits? Yes, it is possible. In order to fully understand what your options are, we recommend that you visit and consult the officials based at the nearest unemployment agency in your state.