by Jeremy
(California)
S-Corp owner receiving UI benefits.
Hi,
For a decade my partner and I ran our own S-corp (just us 2) and paid into unemployment benefits. Business went very dry and in 2009 we filed for unemployment citing lack of funds and began applying for other jobs. However, we didn’t close the company down. Meanwhile, the company kept getting some residual royalties that have accumulated to the point where there is about 3 months worth of regular payroll (which we have chosen not to take). We’re not actively working for the company but looking for other work.
1) Regarding EDD… even though we are not actively working for our own company, it was not shut down and has now accumulated sufficient funds to run a few payrolls. In essence we have chosen to keep those accumulated unpaid funds as a “rainy day”” fund. Is that a problem?
2) Regarding the IRS, are we putting ourselves at risk of an audit by not shutting the company down (15 months after the last payroll)?
Hi,
That’s a very good question. In fact, you might count yourself lucky that unemployment is even a possibility as a corporate officer in California in the first place. (See the Coverage Chartbook – Table 1-7)
But, since California itself, probably provides fuller details you might take a look at the appropriate sections of the benefit determination guide they so kindly offer.
If you are collecting benefits, I’m assuming you were allowed to elect coverage for yourselves and that you have passed all the non-monetary tests thrown at you by the EDD to get benefits.
But if after reading the following information which I will be linking to .. and you still have questions .. I suggest you speak to a California attorney.
California unemployment benefits and self employment TPU 415.05 and 460.6
Like I say, I can only be relied upon to discuss any issue on an informational basis, but if CA allowed you to collect unemployment benefits in the first place .. I don’t think they can demand that you disperse any residual income collected by the s-corp as payroll.
It seems to me that the real issue is whether you are able and available and actually looking for a “job” and whether you are active in working for the s-corp that defines whether you are unemployed or not.
If I were to discuss this anymore .. I would have to take the time to further my research into the referenced statutes and precedent decisions provided in that reference material I linked to.
But I did find the following of interest.
In determining the eligibility of a claimant who has chosen elective coverage, it must first be determined that the individual is unemployed.
Benefit Decision 6669 is an example where the Board held that the self-employed claimant met this requirement. In this case, the claimant was a licensed electrician and electrical contractor. As a contractor he frequently obtained contracts which required him to employ other electricians; however, he also worked at times either as an employee or as an independent contractor. The claimant had reported wages and paid contributions for himself as an employee under Section708(a) of the Code. At the time his claim was filed, he was performing no services either as an employee or as a contractor. He was actively seeking employment in either category. In finding that the claimant was unemployed the Board said:
“. . . Clearly the claimant in this case performed no services nor were wages payable or net income received with respect to the week in which the claim was filed . . .”
Since a finding of unemployed within the meaning of Section 1252 requires both that no services were performed and that no wages were payable, clearly the absence of wages alone does not establish that a claimant is unemployed.