Unemployment benefits for the self-employed: Who qualifies now?

Can you get unemployment if you're self-employed? Generally, no. Self-employed workers, independent contractors, and gig workers generally can’t collect regular state unemployment because no employer is paying federal unemployment or state unemployment taxes, known as FUTA and SUTA, on their behalf.

But some exceptions exist, including Self-Employment Assistance programs in select states, W-2 wages paid to owners of their own corporations, elective coverage in select states, and disaster unemployment assistance. Here’s what you need to know about unemployment for small business owners.

Why regular unemployment usually excludes the self-employed

Unemployment benefits for small business owners generally aren't available. That's because unemployment insurance is funded through the FUTA and SUTA taxes that employers pay on W-2 wages. 

Since self-employed individuals don't have an employer covering these taxes, and self-employment income isn't subject to them, no contributions are made to the state or federal unemployment insurance system, making them ineligible for benefits.

One exception was during the pandemic, when the government temporarily extended unemployment benefits to self-employed workers through several programs. But all of those temporary pandemic-era programs ended in 2021.

What does self-employed mean?

According to the IRS, “generally, you are self-employed if any of the following apply to you

• You carry on a trade or business as a sole proprietor or an independent contractor
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself (including in a part-time business or as a gig worker)”

This means that freelancers and gig workers, and sole proprietors generally can’t get unemployment benefits.

Can 1099 employees collect unemployment?

Can a 1099 employee file for unemployment? Generally, the answer is no.

One of the most common misconceptions is that 1099 independent contractors are considered employees. Contractors and employees are very different. Here’s how the IRS explains it: 

“Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”

Since independent contractors don't have an employer paying unemployment taxes on their behalf, they generally don't qualify for unemployment benefits. The one exception is misclassification. Workers misclassified as contractors may be entitled to benefits.

Here's what the Department of Labor has to say: “Even if you are considered to be an independent contractor by a business entity, the state UI agency will make a determination as to whether that classification is correct under its laws or whether you are an employee and eligible for UI. Being classified as an independent contractor does not prohibit you from seeking UI.”

Workers who believe they have been misclassified can file Form SS-8 with the IRS for a federal tax determination. States can investigate worker classification when an unemployment compensation claim is filed and determine whether the worker is eligible for benefits. 

Can gig workers collect unemployment?

Generally, gig workers are ineligible for unemployment benefits. That’s because gig platform work, such as rideshare and restaurant delivery services, usually doesn’t produce covered wages, as most gig platforms classify workers as independent contractors.

According to the IRS, “as a self-employed individual, generally you are required to file an annual income tax return and pay estimated taxes quarterly. Self-employed individuals generally must pay self-employment (SE) tax as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves”

Since gig workers have no employer paying into the federal or state unemployment insurance system, they’re ineligible for benefits. However, as with other independent contractors, the misclassification exception applies.

Which exceptions exist right now?

Can a small business owner file for unemployment? In some cases, yes. Here are a few exceptions under which self-employed freelance workers may be eligible for unemployment compensation.

Self-employment assistance programs: A limited number of states participate in Self-Employment Assistance programs that allow workers who have been laid off from a W-2 job and qualify for regular unemployment benefits to collect weekly allowances while starting a new business. Delaware, Mississippi, New Hampshire, New York, and Oregon have self-employment assistance programs.

S corp and C corp owners who pay themselves W-2 wages: You may be eligible for unemployment benefits if you operate your small business as an S corp or C corp, pay yourself W-2 wages, and pay unemployment taxes through FUTA and SUTA.

Elective coverage in eligible states: In California, eligible self-employed individuals who also employ at least one other person can elect unemployment coverage under section 708(a) of the California Unemployment Insurance Code (CUIC). This doesn't apply to self-employed individuals who aren't employers.

Disaster Unemployment Assistance: This federal program covers self-employed workers whose income has been lost or interrupted as a direct result of a major presidentially declared disaster. To qualify, self-employed workers must be ineligible for regular unemployment insurance benefits.

How do I file for unemployment if I am self-employed?

Generally, you must apply for unemployment insurance benefits in the state in which you worked. To file for unemployment, contact your state's unemployment agency. Here's how to find your state unemployment insurance office.

Your state will explain the documents needed to apply for unemployment benefits if you’re self-employed. You may be asked to provide the following documents to verify proof of self-employment earnings:

• Federal or state income tax returns
• Copy of Schedule C, F, SE, or K-1 with your Form 1040
• Business financial statements/records
• Recent records connected to the business, such as a phone or utility bill, current business license, or rental agreement for your place of business

Exact requirements may vary by state, so check with your state unemployment agency to determine what documentation is needed to apply.

Is unemployment taxable?

Yes, unemployment payments are considered taxable income. According to the IRS, “Unemployment compensation is taxable income. If you receive unemployment benefits, you generally must include the payments in your income when you file your federal income tax return.” You'll also need to report these payments on your state tax return.

If you received unemployment compensation during the year, you should receive Form 1099-G showing the amount of unemployment compensation paid to you. Benefits you receive in a given calendar year will be reported on that year’s tax return.

If you received unemployment compensation, you may be required to make quarterly estimated tax payments. Alternatively, you can opt to have federal income tax withheld from your unemployment payments.

What happened to pandemic unemployment for the self-employed?

Under the CARES Act, the federal government temporarily expanded unemployment benefits to self-employed workers for the first time at a national scale through several programs, including Federal Pandemic Unemployment Assistance (PUA), Pandemic Unemployment Compensation (PUC), and Pandemic Emergency Unemployment Compensation (PEUC).

• PUA temporarily expanded state unemployment benefits to self-employed workers, independent contractors, and gig workers who normally wouldn't qualify for regular unemployment and were out of work due to COVID-19.
• PUC added a supplemental payment on top of regular benefits, initially $600 per week through July 2020, later reduced to $300 per week through mid-March 2021.
• PEUC extended unemployment benefits by additional weeks for workers who had exhausted their regular unemployment benefits. A separate provision added $100 per week for mixed earners who had both W-2 and self-employment income of at least $5,000 annually.

All three programs ended in 2021, and states no longer accept claims.

Alternatives if you don't qualify for unemployment

If you're unable to qualify for unemployment as a small business but need a way to cover a temporary income gap, a few options may be available. If you have emergency reserves, consider tapping them. A business line of credit may be another option, though this financing solution is best arranged before experiencing an income gap. You can also explore the best business loans and best business financing options to find the best solution for your situation. 

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