Do the Self-Employed Pay Unemployment Taxes?

Do the Self-Employed Pay Unemployment Taxes?
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Traditionally, those who are self-employed cannot collect unemployment because they do not pay into the unemployment system. Lately, the growth in gig workers, who can make a significant income, has caused the government to reexamine its position on the self-employed and unemployment eligibility. Let’s explore some of these changes and what they might mean for you if you are a small business owner, gig worker, independent contractor or freelancer.

What Is Self-Employment Tax?

When you work for an employer, they take out FICA, which goes to Social Security and Medicare. Your employer will pay half, and you pay the other half. The rate for 2020 is ​15.3 percent​.

When you are self-employed, you are responsible for both halves, which you must pay when you file your federal income tax return using Schedule SE. This is called the self-employment tax, but it actually goes to these federal programs. No portion of this tax goes to unemployment.

What Is Unemployment?

Unemployment is an insurance program that is operated by the government that provides assistance when you are out of work through no fault of your own. People will say that they are collecting unemployment when, in reality, they are collecting unemployment insurance payments. The program is funded by federal and state governments, with guidance for operating the programs provided on a federal level.

The states are allowed to decide if they wish to add to the federal eligibility requirements and set their own restrictions on the amounts that can be collected and for what length of time. The most common way of calculating the amount that someone can receive takes a look at the income of the individual over the past few weeks or months and pays them at around 50 percent of what they would have earned on the job.

Confusion arose in the 2020 tax year when some self-employed persons and gig workers were allowed to collect unemployment insurance benefits when no portion of the self-employment tax is allocated to this program.

Self-Employment and the CARES Act

Due to the 2020 coronavirus pandemic, the U.S. government recognized that the economic impacts hit every sector of the workforce, including those who were self-employed. In response to the pandemic, states extended unemployment benefits and loosened some of the eligibility rules. This allowed some who were self-employed to collect unemployment insurance benefits if they could prove that they were out of work due to the pandemic.

States implemented their own guidelines, but the typical rate for self-employment unemployment was ​50 percent​ of the average weekly benefit for the state. Self-employed persons were able to collect half of what those who were employed by an employer would be able to collect. You also must prove steady income during certain periods. Some companies allowed independent contractors to collect unemployment uncontested.

Other unemployment benefits were also available for the self-employed that were privately funded and were not a part of the federal unemployment insurance program. These included the Paycheck Protection Plan (PPP), Freelancer’s Relief Fund (FRF), Disaster Unemployment and Assistance and Self-Employment Assistance Program (SEAP). You might also be eligible for special tax credits.

Implications for Self-Employed

These programs provided some relief to freelancers and the self-employed, and some were able to collect federal unemployment insurance payments. All income from self-employment and these other programs are taxable, so you will have to “make up” for the fact that you collected but did not pay into the program beforehand.

The self-employed are generally not eligible for unemployment benefits because they do not pay into them, but the government made an exception due to these unprecedented times; this has been the source of much confusion over the topic.