Can an S Corp Owner Collect Unemployment?

The way that unemployment benefits work is that you need to be unemployed and fulfill some requirements to receive weekly payments. This is a helpful service that supports people to afford food, medicine, and other basic needs while they are looking for a new job. But when it comes to people who are self-employed and own an S Corp, things are different.

Since you are working for yourself, you do not have any employees to offer a minimum wage, being a requirement of the IRS. So, along with Limited Liability Companies (LLC), these are not eligible to receive unemployment.

But there is a way that you can still be eligible to collect unemployment benefits. So we suggest that you keep reading as we are going to discuss what is an S Corp and what do you need in order to receive unemployment.

What is an S Corp?

This is a type of self-employed corporation available for small and family businesses. The catch is that every company comes with a tax rate, and with time it tends to grow. But for an S Corp, there are certain benefits regarding taxation.

These companies are exempt from federal income taxes, and it is thanks to the capability to pass income, deductions, credits, and losses through their shareholders. After this, your shareholder declares all the information on their personal tax returns and receives a certain taxation rate.

With this, you can avoid double taxation of your income, in other words, the corporation will be taxed only once. Do not confuse an S Corp this with an LLC, as the former pays taxes on a predetermined salary, while the latter has to pay on the entire amount.

Qualifications to be an S Corp owner

In order to be an owner of this type of corporation, you must first complete certain requirements. The IRS detailed specifically what you need to accomplish, so if you have any other doubts, you can check their website:

  • You cannot have more than 100 shareholders and they cannot be foreign.
  • On top of that, your shareholders need to be individuals, estates, or certain trusts. If they are partnerships, corporations, or nonresident alien shareholders, then they cannot qualify as adequate and qualified shareholders.
  • The S Corp needs to be a domestic corporation.
  • You need to have only one class of stock.
  • Finally, make sure that your company is not an ineligible corporation, like insurance companies.

Once you complete all of these requirements, you need to file Form 2553 and you have to also make all of your shareholders sign it.

Method to receive unemployment

One of the reasons that S Corp owners have a difficult time with this topic is because of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). There was an extension for unemployment last year, but in September during this year’s Labor Day, it ended.

This extension was also available for self-employed workers, contractors, and gig workers, so the process to accomplish the requirements was more flexible.

By now it is important to reaffirm that self-employed companies such as LLC and S Corps cannot receive unemployment benefits. As usual in every state, the requirements are that your unemployment reasons are no fault of your own, actively seek a job, be able and available to work, and finally meet a monetary limit.

But an S Corp owner could not get these benefits since they cannot achieve that last requirement. In other words, as the owner you do not receive a salary, so fulfilling the base period requirement was an inconvenience. However there is a way to solve this, and that is to pay yourself in W-2 wages.

Treat yourself as an employee of your S Corp and receive a paycheck where it includes your federal and state taxes. With this in consideration, the only thing left to do is to look for a job every week.