Bookkeeping

Can a business owner be on unemployment?

I have a client who has a fashion design business. She has an S Corp in CA and was on payroll till May 2020. Since her business was not doing well, she applied for unemployment, she was qualified and is being paid unemployment. Starting a month ago her business started to normal again and she even hired some interns and one part time employee. But herself is still on unemployment and not on her company’s payroll. Can she do that? When I tried to warn her, she said corporation is a separate entity from the owner and yes I can do that! Could you please advise if this is correct or she would be in trouble for her tax returns next year?

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  1. 74 Answers

    Hi there, excellent question. The first question to ask is if your client prior to COVID-19 was set up as a W2 employee and covered by unemployment insurance? If she was then while the business is closed she could collect unemployment. There were quite a few COVID-19 assistance programs under the CARES Act that provided assistance to business owners. However, once the business reopened she is no longer eligible to collect unemployment. As an S-Corporation shareholder, there is an expectation that your client will pay herself a “reasonable” salary. The term reasonable does state a specific amount, however the amount is determined by the gross receipts of the organization. There is an expectation that something will be paid as a salary and therefore, she can no longer collect unemployment. Technically she is no longer unemployed. The business is operational and if she is managing the business in any capacity then she is no longer unemployed regardless of the dollar amount of the salary if any that she is collecting. I hope this helps, thanks for reaching out.

    Here is the link to the IRS guidelines:
    https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues#:~:text=S%20corporations%20must%20pay%20reasonable,made%20to%20the%20shareholder%2Demployee.

  2. 15 Answers

    Thanks for your explanation. She was on payroll and all payroll taxes have been paid before pandemic. But when I tell her that now she is making money again and needs to start to be on payroll, she says I can still use the unemployment!!! So I should for sure ask her to stop collecting unemployment, right?

    • 74 Answers

      Absolutely, she should stop collecting unemployment. As the owner of the S-Corporation, which is a pass-through company she is considered the owner and expected to take a salary as long as the business is operational. During COVID-19 when the business was closed would have been the only time it would have been ok for her to claim unemployment insurance. But a soon as the business opened back up she can no longer collect unemployment.

  3. 15 Answers

    Thanks a lot

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