Sole Proprietorships and Partnerships
If your business is considered a sole proprietorship or partnership, you're undoubtedly asking yourself, "Do self-employed people pay unemployment insurance? Your income from the business is not subject to payroll taxes. You are considered self employed and are not classified as a W-2 wage earner, which means you are not required to pay unemployment insurance on your wages. If you're not sure if your business is considered a sole proprietorship, consider how your business income and expenses are reported each year to the IRS. If you file a Schedule C and attach it to your 1040 income tax return, you have a sole proprietorship. Partnerships report income and expenses on IRS Form 1065, but partners claim their individual shares of business profit or loss on Form 1040.
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Limited Liability Companies (LLCs)
An LLC business structure is treated as a default entity upon organization. LLCs are formed and recognized under state statute but are not recognized by the IRS as entities separate from their owners. By default, the IRS treats a single member LLC as a sole proprietorship and an LLC with two or more members as a partnership. If you do not make an election with the IRS to have your LLC treated as a corporation, you are considered self employed; and similar to a regular sole proprietorship or partnership, you don’t have a requirement to pay unemployment insurance. If you make an election with the IRS to treat your LLC as a corporation, you will be classified as a W-2 wage earner and your wages will be subject to regular employment laws. Under these rules, you're required to pay unemployment insurance on your earnings.
Federal and state employment rules classify corporate officers as employees. If you own a corporation, you must receive your income in the form of wages through a payroll system. Your earnings are subject to the same payroll tax withholding requirements of a regular employee. Since you are classified as an employee under this business structure, you are not self employed and must pay unemployment insurance. Similarly, owners of S Corporations and elected LLCs are employees and must pay unemployment insurance.
I’m Actually an Employee — Now What?
Contact your state unemployment insurance division to establish an account. If the company you own pays you more than $1,000 each year, the state unemployment office will set the rate you’ll need to pay. Generally, state insurance payments are due quarterly and are based on your gross wages. Additionally, you’ll need to pay federal unemployment tax to the IRS, but if you already have an employer identification number, you do not need to establish a new account to pay the federal taxes. Depending on the amount of income you earn from the business, you may only have to pay federal unemployment once at the end of each year. Consult the instructions for IRS Form 940 (www.irs.gov) for more information.