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Obeyor

S-Corp and Unemployment

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Hi Guys! I must say I absolutely love love love this forums. I have a quick question:

 

I have a DBA, but State of California is making it very hard for me to be employed in my business as a DBA. Basically I am "per project" employee...therefore a contractor. At the end of the job..well..I'm out of it and I have to go out looking for the next. Many many times, since the 2008 economic collapse, California has cracked down on DBA employment. Someone has suggested that I switch to an S-Corp. I looked into it and it sounds like a good idea. However, what happens if I don't get any business in any quarter?

 

Since I have to pay myself a reasonable salary from the S-corporation and therefore pay unemployment taxes on my salary, am I not allowed to file for unemployment? I'm scratching my head. Also, I understand that if you take profits ONLY from the S-corp, then you are not allowed unemployment, because profits are not taxable. 

 

Any thoughts? Thank you Thank you Thank you in advance for any shared knowledge. 

 

My best to all of you

 

Obeyor...on the conveyor.  :)

 

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Not really sure what your concern is ("what happens if" type questions don't work real well in this sort of format) or why you think you cannot work as an independent contractor under a fictitious business name (or why you wouldn't simply work as an IC under your own name without a fictitious business name or corporation -- in other words, why make things complicated?).  Contrary to what you wrote, you are not required to pay yourself a salary if you work through a corporation.  As far as dealing with payroll taxes if you choose to form a corporation and work through it, you should consult with a local tax adviser/CPA.

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You might want to clarify what you mean when you say the state “has cracked down on DBA employment.” What is it, exactly, that the state is doing that is making things difficult for you? The phrase “DBA” stands for “doing business as” and simply refers to the use of a trade name to conduct business by a sole proprietor. For example, suppose that John Doe conducts his sole proprietorship photography business as “Great Sierra Photography”. All the laws of most states require is that he register the name “Great Sierra Photography” so that others can find out who the owner of the business is if needed. There isn't any particular difficulty in using a DBA to conduct your business.

 

If your issue here is that you want to collect unemployment compensation after each job until you get a new one, as a self-employed person that will, of course, be a problem. It has nothing to do with use of a trade name. A self-employed person controls his or her own work and does not pay unemployment compensation insurance on his earnings an thus generally does not qualify for unemployment compensation. 

 

If you create a corporation through which you conduct business, you might qualify for unemployment compensation when you are not working, but then of course the corporation would have to pay unemployment compensation insurance on your earnings, and each claim of unemployment would increase your company’s experience rate and the unemployment tax that you pay. As the sole owner/employee of the corporation you would an officer of the corporation. See the California Employment Developement Department discussion of Corporate or Union Employee for how this works. 

 

The term “S-corporation” is a federal tax term that refers to corporations (or entitles that have elected to be treated as a corporation for federal tax purposes) that have elected to be taxed under the provisions of subchapter S of the Internal Revenue Code (IRC). Contrary to what seems to be popular belief the S-corporation is not required to pay you a salary at all for the work that you do as an officer for the corporation. However, any distributions that you receive from the corporation, whether you call them salary or not, will be treated for tax purposes as a salary until you have been paid what amounts to a reasonable compensation for the work you performed for the corporation. And, of course, unemployment benefits are based on what the employer pays you. So, no salary or wages paid, no unemployment benefits.

 

It would be better for you to keep looking for new customers so that when you finish work for one customer you have other work lined up to do. If you are having trouble making ends meet by being self-employed, you may want to consider looking for a steady job.

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Gentleman, first let me express my true thanks for sharing some knowledge. Yes DBA is doing business as. California State has had a "contractor problem" meaning, after the financial crisis because a lot of people went 1099. they called it a 1099 economy. So, while they do not have the law on their side, I'm not sure how they convinced the payroll companies to make it difficult for DBA to work.

 

For example I had to argue with 3 payroll companies that did not want to pay me as a DBA. Why? Because one said "we don't want to be responsible for your taxes if you don't pay" (which is stupid because I've had a DBA for 10 years now and I pay my taxes), another one said "We don't deal with DBA because you are not listed on the California Tax Board (another BS, because I showed them not only my paperwork with the state seal and the tax ID issued by the IRS, but I also showed them that they did it in the past, before 2008). In any case, they are making it difficult. Mind you it's not the employers its the payroll company. (who heard of that stupidity). Here in Los Angeles, specifically, a lot of people started to convert to S-Corps. So I needed read a bit on it but I had some question, hence why I posted on this forum. 

 

Now, pg1067, thank you. Tax Counsel, also I deeply thank you. I do hustle for new clients, every year. Knock on wood, for the past 10 years I've had luck and steady employment. So let's say for the argument I make 100,000. What you say is that the distributions that I receive from the corporation will be treated as salary until the "reasonable compensation" is met. That is what is confusing. I heard horror stories about people who paid themselves too much or too little and invite IRS audits.

 

The reason I was confused about unemployment is this: if I pay myself a salary, say $30,000, then that will be taxable just like any employees. That would mean social security, medicare and unemployment. So then ME personally I would pay that, because my S-Corp would choose a payroll company to do that. So it begs the question... isn't that person that is paid a salary entitled for unemployment? Of course, I wold have to constantly be looking for work, not just for tax and legal purposes, but to survive. 

 

Hence that is why I wanted to find out what the are pros and cons of S-Corp. For your info, I am a freelance writer with a DBA. But my assignments can last up to six months and I had been forced by this payroll company arguments, to work as a staff member, but knowing that my end date was set. Some years I would take unemployment but many I did not. I'm trying to educate myself since I am also sick and tired of my accountant, who sort of ignores me for better fish and I am in limbo until I find another .

 

many thanks to both of you. you are the best. 

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I think you are misunderstanding some things.  Companies are reluctant to hire individuals because they fear that the IRS will come along and determine that the "independent contractor" they thought they were hiring was really their employee.  In most cases you are really a temporary employee. When that determination is made, the IRS (and potentially the state, but most often the IRS) will come down on them like a ton of bricks and force them to pay all the taxes that they were supposed to withhold (and in the case of SS * Medicare taxes, match) from the employee's pay. The consequences are extremely expensive to the companies.  So they would prefer to contract with a company to provide them with the labor. That's where the corporation comes in. It gives them arms-length separation from the individual legally, at least to some extent.

 

In some states, if you are laid off from your job with your own corporation you qualify for unemployment, but in some states you would not. I'm not in a position to research California right this minute (perhaps someone else knows) but I would guess that if your wages aren't exempt from the tax then you'd qualify. Of course that will change your rating and increase your unemployment tax in the future.  There's no free ride. 

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Did you ever get to the bottom of this.?

I'm having a similar issue.  My wife and I are both actors and work regularly but sometimes go through a few months where we are actively looking for work just not getting the jobs.  We always collected unemployment in these down times.  We just opened an S Corp this year to be able to write off more business expenses but we are wondering if we can still file for Unemployment in the downtimes? 

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