Independent Contractor Unemployment: Here’s What You Should Know

In the United States, the unemployment insurance program has been helping individuals who have unexpectedly found themselves out of work. Traditionally, however, this only applied to people who worked in the traditional economy.

But in light of the ongoing COVID-19 pandemic, this norm has changed. Legislation has been passed to expand the coverage of unemployment benefits to groups who are in the gig economy.

If you’re an independent contractor in the US and you’re wondering if you’re qualified for unemployment benefits then this blog is for you! Today, we’ll be talking about the key things you should know about independent contractor unemployment. Let’s get started!

What Are Unemployment Benefits

Federal and state unemployment insurance programs have existed in the U.S. since 1932 when Wisconsin passed the first public unemployment insurance program in the United States. Three years later, the federal Social Security Act of 1935 was passed which created programs in other states.

Unemployment benefits are typically awarded to workers who have become unemployed for having been laid off, losing seasonal work, or being furloughed. It is designed to temporarily provide financial assistance to eligible individuals while they are looking for new work.

While these programs are administered at the state level, it is funded by businesses that pay  Federal Unemployment Tax Act (FUTA) taxes and State Unemployment Tax Act (SUTA) taxes.

Workers can receive unemployment benefits for up to 26 weeks. Meanwhile, the amount is usually based on their average annual pay and in the state they reside. The national average weekly payment in 2020 was $378.

Are Independent Contractors Eligible for Unemployment

In the past, unemployment benefits are only offered to people who work in the traditional economy—where they are employed by a company on a full-time basis to carry out a particular task. This is because these businesses pay FUTA and SUTA taxes which fund these programs.

However, the COVID-19 pandemic has affected the livelihood not just of workers in the 9-to-5 setup but also those who are in the gig economy. Because of this, the U.S. Congress has passed new legislation that expanded the coverage of unemployment benefits to include self-employed individuals. This includes:

• Small business owners. These are self-employed professionals who operate small-scale businesses that may be a sole-proprietorship or with fewer than 500 employees.
• Independent contractors. These are self-employed individuals who work with clients across different types of industries. They are typically service providers who complete work according to the specific requirements and directives of their clients. They are in charge of acquiring clients, the overall operation of their work, and general liabilities.
• Gig workers. These are individuals who, like independent contractors, seek out their own clients. They commonly take on short-term projects and tasks.
• Freelancers. These are independent contractors and/or subcontractors who generally work in industries like web design, digital marketing, content writing, software design, and business consultation.

So, if you work for yourself as a small business owner or as an independent contractor where you are solely responsible for finding clients and completing the work, then you may be eligible for federal and/or state relief programs.

State Unemployment Benefits

At the state level, self-employed individuals may qualify for the Pandemic Assistance Program (PUA), Pandemic Unemployment Compensation (PUC), or the Pandemic Emergency Unemployment Compensation (PEUC) as provided by the Coronavirus Aid, Response and Economic Security (CARES) Act.

The CARES Act provides unemployment benefits to self-employed professionals who aren’t normally eligible to receive it. The amount given to individuals may vary depending on their income, location, and additional specific guidelines.

The CARES Act can also include supplemental aid amounting to a total of $600 per week over the course of up to four months. Furthermore, additional weeks of unemployment benefits may be given if an individual is still unemployed after the state benefits are sued up. This means an eligible person can receive unemployment benefits for up to 39 weeks.

You can file a claim with your state’s unemployment office along with these documentary requirements:

• A state identification or driver’s license number
• Your social security number or employer identification number (EIN)
• Proof of residence such as documents with your address
• Proof of income including any 1099, W2, or 1040 tax forms, pay stubs, or previous tax returns
• Your bank account information, including account and routing numbers

Federal Unemployment Benefits

At the federal level, eligible individuals can file a claim for the Self-Employment Assistance Program (SEAP). This provides a special type of unemployment aid to individuals who were just getting their small business operational when lockdown orders began. It also provides aid to people who are displaced or out of work while starting a new business.

Similar to regular unemployment benefits, SEP provides a weekly allowance while an individual is building his business, marketing to clients, and completing other activities that help you establish your new business and your status as a self-employed business owner.

Note, however, that some states do not offer SEAP. So, check with your local unemployment office beforehand.

Alternatives to Unemployment

Apart from state and federal unemployment aid, you may also be entitled to other relief programs as a self-employed individual affected by the pandemic. This includes:

Paycheck Protection Program (PPP)

The PPP program is funded by the Small Business Administration to provide small business loans for business owners who are impacted by the pandemic. This includes financial support for small businesses, sole proprietors, independent contractors, freelancers, and other self-employed professionals to covers payroll and business expenses

Eligible for this program are:

• Small businesses that meet the SBA’s industry-based or alternative size standard
•  501(c)(3) nonprofit, a 501(c)(19) veterans’ organization, or a Tribal Business according to (sec. 31(b)(2)(C) of the Small Business Act
• Food and hospitality services with more than one location and less than 500 employees at each location
• Sole proprietors, independent contractors, or self-employed persons

Eligible individuals can use the PPP program for

Tax Credits

The Internal Revenue Service (IRS) recently announced the release of Form 7202 for eligible self-employed individuals to claim sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA).

This provides up to two weeks of sick pay at your average income amount and up to 12 weeks of family leave with your pay at two-thirds of your normal income if you have kids whose school is closed.

For self-employed individuals, who will take leave for themselves, it must be because you can’t work or telework due to:

• A federal, state, or local isolation or quarantine order
• Advisement from a health care provider to self-quarantine
• Symptoms of COVID-19 leading you to seek a medical diagnosis
• Getting the COVID-19 vaccination (beginning April 1, 2021)

This is also based on the number of days in the tax year that you are not able to work because of the reasons stated above. Credit is a maximum of 10 days multiplied by either your average daily self-employment income for the year or the average daily income of $511; whichever is smaller.

Freelancers’ Relief Fund (FRF)

The FRF is a financial assistance program provided by the Freelancers’ Union. It offers up to $1,000 to gig and freelance workers who are experiencing the economic effects of the pandemic.

Eligible individuals are freelancers whose sole income is through freelance work and has lost at least 50 percent of their normal income. Applicants are required to complete a certified application form to demonstrate eligibility, including a detailed questionnaire assessing work history, annual household income, description of hardship, type of funds, and funding amount requested, including supporting documentation.

When applying, you’ll need to submit the following documents:

• Your 2019 tax files or annual financial statements
• Two consecutive months of financial statements from 2020
• Any relevant client and contract information and communications
• Additional financial documents like tax returns, bank statements or profit-and-loss statements

Disaster Unemployment and Assistance (DUA)

Depending on the state where you live, you may qualify for DUA. This is a federal assistance program that provides aid to people who have lost work due to a major disaster that is presidentially declared.

You must have been determined not otherwise eligible for regular unemployment insurance benefits (under any state or federal law).

Payment will be made to an unemployed worker, who as a direct result of a Presidentially declared major disaster:

• No longer has a job.
• Is unable to reach their place of work.
• Cannot work due to damage to the place of work.
• Becomes the head of the household and is seeking work because the former head of household died as a result of the disaster.
• Cannot work because of a disaster-incurred injury.

Conclusions

It’s not a secret that many people’s livelihoods have been affected by the COVID-19 pandemic. The good news is that there are stimulus programs that can help unemployed individuals to get back on their feet more easily. With the new pieces of legislation, state and federal laws now extend independent contractor unemployment benefits.

So, if you haven’t already, check with your local unemployment office to know more about the programs you are eligible for. It will also help to know the schedule available for the state you live in.

Don’t forget to check out some of the other helpful tips for freelancers on our blog.