Unemployment Benefits for the Self-Employed?
I was poking around the internet the other day and came across this article in Time and learned about a new unemployment policy. They do a good job of explaining it so rather than paraphrase the whole thing I’ll just quote them. Here is an excerpt of the article.
Traditionally, unemployment insurance has only been made available to unemployed individuals who were actively seeking a traditional job. These funds could only be accessed for personal use; all other uses — such as starting a business — were strictly prohibited, and only job seekers qualified for these funds. Individuals with a desire to seek self-employment opportunities were ineligible for any unemployment money.
Now, imagine if aspiring entrepreneurs — individuals whose main priority is to hire themselves, build revenues and hire others to grow — had access to this sort of guaranteed startup capital. Well, under the American Jobs Act, they will.
According to Obama’s plan, all 50 states would be able to establish Self-Employment Assistance (SEA) programs, enabling aspiring entrepreneurs to utilize unemployment insurance money to fund their businesses for up to 26 weeks —providing roughly $10,000 to $13,000 in assistance, or what I would refer to as “seed funding.” Not a bad deal when you consider that the cost of most startups, especially most service-based businesses and tech ventures, have relatively low startup and operating costs. In essence, the president’s plan will create a guaranteed source of startup capital for businesses without any of the traditional credit and collateral requirements as barriers — or the need to give away equity to investors. Someone pinch me.
This must be too good to be true, right? Or, at the very least, SEA must be some rhetoric-filled, highly impractical, totally unachievable, overly complicated government program. Actually, SEA has a proven track record of success in states that are both red and blue. According to a Department of Labor study of state self-employment assistance programs, SEA participants were 19 times more likely than eligible non-participants to be self-employed. In a handful of states where SEA programs are active, such as Arizona and Maryland, hundreds of businesses and new jobs have been created as a result. In Oregon, nearly half of the successful SEA entrepreneurs have each created an average of 2.63 new jobs.
What do you think about that? I was all ready to say it’s no good because when you have a business you always have the option of not taking an income and growing the business instead. You can buy equipment, pay off business loans, and expand all instead of taking an income. And really, if you were smart you would do that so you could stay on unemployment and grow your business at the same time. But the provision only allows for 26 weeks of payments. Which is long enough, but not too long.
I also like that this program isn’t forced on the states. The states have the option to instate it, they are not required to do so.
I would worry about the amount of time being extended though, so that gives me pause on the whole plan. What do you think?
Ashley
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Comments
One problem I have is that if the business is an S-corporation, there must be payroll taken by the shareholder officer in a reasonable amount. It is part of the rules by the IRS governing S-Corps and the taxation pass-through. If there is significant net income and the money is being left in the company, rather than taken as salary and then distributed to the shareholders (the purpose of this structure is to distribute all net profits each year) then there could be some trouble.
I also have a problem understanding where this money is going to come from. Many of the states are already operating at insufficient levels to maintain current unemployment compensation cases, let alone taking some of those funds and using them for another purpose. Plus, I wonder how this will be monitored: for job seekers, they have to show verifiable proof of applying and interviewing for jobs, but it would be more difficult to track how all of these would-be entrepreneurs are spending the money.
@ Eric: How I took it is that these are people who are already on unemployment anyways. People who if they didn’t start their own business would be looking for jobs. So it’s not an additional cost.
I guess if the business fails and they go back to lookikng for a job after the 26 weeks that was a waste of time as maybe they would have found a job instead of trying to start the business. That would be an extra cost.
I have the same problems as you as far as how to monitor the growth of a business and “prove” you are trying in the same way you can prove you are looking for a job. You’d need a CPA and business consultant for every account to prove that the business is being run properly, and even then there are going to be differences of opinions. It’s an art and risks have to be taken. Who’s to say what will work until you try it.
I agree with LH. The idea is a good one if it can be sustainable. There has to be a limit in order for it to be. Investing in jobs for the future though is never a bad idea. It just needs to be done right.
I guess I’m just a little skeptical of the whole idea of “hey let’s fund businesses rather than help train them to get jobs or educate them on running a business”. Seems to me like they would be throwing money at the problem rather than working toward a real (and sustainable) solution. But, if they say it has worked, then who am I to argue with the results.
This is interesting! It seems like a good idea, although I’m not 100% sure it will work. I think the intentions are good, and I think it’s a step in the right direction to reform the current unemployment benefits system. It’s great to support entrepreneurs and creating new jobs, and this could be hugely beneficial in the long term.
The way I understood it, traditional unemployment benefits are funded by companies who pay into the system through taxes. Not a tax on the employees, but rather a “hidden” tax on the company. Think of it like an insurance policy, in which companies pay the premiums and the unemployed collect the benefits.
If this goes through and these funds are drawn from the same place, wouldn’t this mean that companies are now funding business start-ups and dreamy entrepreneur deals? Doesn’t sound fair to me. I am always all for government just butting out and letting people and businesses (the free market) take care of themselves.
Excellent point Matt. In fact, I bet many of the start ups would be in the same industry as the companies that are paying their benefits. Say an employee of a carpet cleaning company gets laid off, chances are they will go start another carpet cleaning company. Therefore, competing with the very company that is allowing him to even be in business. It’s not fair to the original company.
I also wish that the government would stay out of it… but thats’ not going to happen any time soon.
Sounds good. Assistance for those who want to start their own business is good. And the cut off time frame is good motivation to get it off the ground.
There is a program like this where I live (my area, in Canada). The program requires that you qualify for EI, within a certain set of parameters – ie, I think that parental leave EI doesn’t count, but I’m not sure.. plus I don’t think you have that in the States. If you qualify, you then participate in a business development and coaching program, where you take classes and develop a business plan. You are also assigned a mentor from the community as part of the process. Each week, you must submit a sort of log book of how many hours you have spent working on your business, ie the “proving you are looking for a job” component of EI receipt. The funding lasts for 6 months or a year, I don’t remember specifics.
I live in a small, tourist town, where many people have used the program to create quite successful businesses.
Contrary to the statement someone made above, most people do not attempt to create businesses that are the same as the ones where they lost their jobs. The market research component of their business plan writing would rule that out fairly quickly.
I actually used to work at a business that was started via Community Futures. My boss now employs about 25 people! A co-workers girlfriend is also in the process of opening a yoga and spin studio with this program, as there is demand way beyond what the gym and existing studio are offering.
While not all of the businesses succeed, where I live there have been several and everyone is extremely grateful for the small amount of money that they receive while pouring everything into startups!
Matt, I think it depends on the state. Here in Colorado, I have just 4 taxes on my pay stub: Federal, State, FICA, and Medicare. When I lived in NJ, I had 7. One of those was for unemployment insurance.
I think it sounds like a decent plan as long as there is a cut-off. Funding people to become self-sufficient and start their own company is a great incentive!