Starting a Business Using Unemployment Benefits? What You Can Claim and How to Navigate Taxes.


Starting a Business Using Unemployment Benefits? What You Can Claim and How to Navigate Taxes.

Blond man drinking coffee and using smart phone in a room with loft interior.

Many individuals who have recently lost their jobs may be considering whether they should start a business using their unemployment benefits. According to the U.S. Department of Labor, starting a business using unemployment benefits is allowed and could be a great option for an aspiring business owner who is currently unemployed. But how do you navigate all the rules for unemployment benefits and taxes while working on your new business?

Whether you've always wanted to start a business but didn't have the time or your unemployment has sparked a new business idea, now could be the time to make lemonade out of lemons. After all, there are plenty of business opportunities that can thrive during an economic downturn. Here's what to know about financing and taxes if you're using your unemployment benefits to start a business.

Financing Options Aside from Unemployment Benefits

Using your weekly unemployment benefits to begin a new business can be a great way to utilize this money to start a new venture. Additionally, there are plenty of small business loans and funding options you can consider while you are also claiming unemployment.

Some states offer the Self-Employment Assistance Program (SEAP), which allows the recently unemployed to create their own jobs and get their businesses started. With SEAP, if you happen to start earning an income from your new business, that money will not be deducted from your unemployment payments when you make a weekly claim.

In addition to SEAP, the CARES Act established several new temporary programs to help the self-employed, solopreneurs and small business owners:

  • Economic Injury Disaster Relief Loans - These low-interest loans economic relief to small businesses and nonprofit organizations that are currently experiencing a temporary loss of revenue.
  • SBA Express Bridge Loans - Enables small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 quickly.
  • SBA Debt Relief - The SBA is paying six months of principal, interest and fees for borrowers that owe on 7(a), 504 and Microloans.
  • Paycheck Protection Program - This loan program provided loan forgiveness for retaining employees by temporarily expanding the traditional SBA 7(a) loan program. While this program ended on August 8, 2020, it was on its second round of funding. Check often to see if this program gets reopened.

Do your research on what each type of loan or source of funding offers and what may be the best fit for you and your business goals.

Incfile | Entity Comparison

Claims from Your Unemployment Benefits

Each state has its own policies on calculating unemployment benefits for individuals who work part-time or other jobs. Many states allow workers to collect unemployment benefits until their total earnings equal or exceed what they collect on unemployment.

You are required to report your earnings when applying for your benefits. If your earnings exceed your current benefit amount, you typically won't receive benefits for that week. So if you start any new business and it takes off and becomes equitable, you may lose your unemployment benefits.

If you use the SEAP program, you can work full time on your business and still collect unemployment money. Any money earned from your new business will not be deducted from your unemployment benefits, making this program ideal for a new business owner. SEAP is only available in certain states, so be sure to check if your state participates.

Navigating Taxes Through Unemployment Income 

When you go to file your 2020 taxes next year, you will have to take into account what you may have made while employed, while unemployed and any business profits and losses you made have made after starting your business.

If you received unemployment compensation during the year, you must include it in your gross income. You will receive Form 1099-G, which will have the amount of employment benefits paid to you throughout the year. This amount will need to be included in your income tax return. Taxes are paid on unemployment benefits at the federal and state level. The federal tax bracket ranges from 10–37 percent, which will determine how much you pay. Some good news is that FICA taxes, made up of Social Security and Medicare taxes, are not withheld from unemployment benefits and are not owed at tax time. The majority of states also tax unemployment benefits, which you will also owe at tax time.

Keep in mind that even without income, you may be able to deduct your expenses, as long as you meet certain IRS guidelines. Keep track of what you spend to start your business, such as the cost of inventory, the purchase of a company car or office space, use of a home office, employee salaries and office supplies. Claiming these deductions can offset other income on your tax return and lower your overall tax bill.

The Trump administration recently rolled out additional measures for unemployed Americans in early August. This helps boost unemployment benefits per person by $400 per week. States are supposed to kick in an extra $100 a week, which is on top of the federal government’s $300 subsidy, as part of a cost-sharing requirement; however, that amount isn’t necessarily guaranteed. The aid is scheduled to end on December 27, 2020, according to the Labor Department.

Become an Entrepreneur Today

Navigating unemployment and starting your business at the same time can be quite the challenge. However, the reward of starting a business during this time may pay off and lead to a lucrative income for you.

So are you ready to launch your business while you are on unemployment? Incfile can help! You can launch your business for $0 + state fees.

Not Sure Which is the Right Entity for Your Business? Use Our Free Entity Comparison Guide.
Paper List

Like What You're Reading?

Get fresh monthly tips to start & grow your LLC.

Related Articles

  • 32 Side Hustles from Home That Pay More Than $100 an Hour
  • 15 Items You Can Easily Flip for $100-$5,000 in Profit a Month
  • A Giant List of Self-Employment Ideas
  • 11 Out-of-the-Box Side Hustles for Women to Make an Extra $1,000 a Month
  • How to Pay Yourself as an LLC Owner
  • What Is an LLC? Super-Simplified Infographic
  • So You Moved? Follow This Guide to Moving Your LLC to Another State
  • If You're Not a U.S. Citizen, Can You Get an EIN for Your Business?
  • Understanding DBAs and How They May Be Beneficial to Your Small Business
  • 15 U.S. States with the Lowest State Fee to Start a Business Today
  • Are Non-U.S. Residents Allowed to Own a Corporation or LLC?
  • Need a Physical Address for Your Business?
  • 5 Virtual Address Services for Your Small Business
  • How to Create and File an LLC for Free
  • LLC vs. S Corp: Which Is Right for Your Business?
  • S Corp vs. C Corp: Differences and Benefits of Each
  • ​Do LLCs Get a 1099 During Tax Time?
  • Series LLC vs. LLC: Which One Do You Need?
  • PLLC vs. LLC: What You Need to Know
  • 7 Home Business Ideas That Double as Tax Write-Offs