Losing a job has been the catalyst that has launched many people into entrepreneurship.  Finding the time to start a business is difficult when working and trying to live off of unpredictable self-employment income keeps many from ever making the leap.

Having the safety net of unemployment income and the time to pursue entrepreneurship, many people have taken a job loss as a time to finally start their business.

While each state is different, eligibility for unemployment insurance while self-employed typically depends on the amount of income generated by the business, the business activities are being performed and the amount of time spent on the business.

Business Income

Some states don’t restrict a person from collecting unemployment while making self-employment income from business ownership, however, this additional income will often offset the benefits.  Similar to a person who works at a part-time job while collecting unemployment benefits, income from the part-time job must be reported. Self-employment income from a business start-up is typically considered the same.

For example, if your weekly benefit is $500 and you made $300 in wages or earnings from the business, you would receive the remaining $200 in unemployment compensation.

Business Activities

Some states will permit a person to collect benefits and start a business provided the business activities are different from the unemployed workers previous line of work.  Other states do not have this requirement.

Some states have an even more strict policy against self-employment income while receiving unemployment, even if the business is not making any money.  Just the mere filing of an LLC in some states could put the recipient’s benefits in jeopardy.

Time

One factor that may impact receiving benefits is the amount of time spent on the business that could have been spent looking for or being able to start full-time employment.  If the unemployment office determines that too much of the recipient’s time is being spent on the business, benefits could be reduced or eliminated.

While it’s tempting to try and hide a business and collect benefits, it’s a good idea to follow the rules otherwise there is a risk in having to pay back benefits.  The rules for each state varies, but they all have the ability to come back after funds several years later, should they find a reason to do so.

Unemployment Programs to Help Start a Business

A few states have initiatives encouraging individuals on unemployment to start a business.  The Department of Labor has a program called the Self Employment Assistance program (SEA). This program allows people to collect unemployment compensation while they work on their business.  By choosing self-employment over getting a job, there are different reporting requirements.

That program was launched during the last recession and many states have since stopped offering it.  A few states that still offer the SEA program include:

Mississippi
New Hampshire
New York
Oregon

Who is Eligible for Self-Employment Assistance?

Some eligibility requirements for SEA include:

• The recipient is eligible for and currently receiving unemployment insurance benefits.
• The individual is not likely to return to employment.
• The recipient has a viable business idea, willing to work full-time in developing the business, and having the finances necessary to get started.

If those eligibility requirements are met and the individual takes steps in getting started such as getting business counseling, writing a business plan and showing progress in starting a business, they may be able to get self-employment assistance.

Minnesota has a similar program called the Converting Layoffs into Minnesota Businesses or Climb.

Similar to SEA, Climb is an initiative through the state’s Dislocated Worker Program to promote entrepreneurship as an alternative to out-of-work individuals in finding another job.

As eligibility varies from state to state, it’s best to not take a chance in jeopardizing unemployment insurance benefits.  Be sure to first check with your state’s unemployment office to get the correct information before starting.

Links for each state are included below.