Working for yourself offers a number of benefits, from a flexible schedule to control over your business actions and income. However, there are also disadvantages to self-employment that workers need to be aware of. Self-employed individuals don't pay most forms of unemployment tax, but they are also ineligible for unemployment benefits if they lose their source of income.
Most employers deduct state unemployment taxes from every employee's paycheck. This money goes to fund state unemployment insurance, which workers who lose their jobs may be eligible to receive. However, employers who contract with self-employed workers do not make unemployment tax deductions. Self-employed workers do not need to deduct state unemployment taxes from the money they earn, making them ineligible for benefits.
The federal government also imposes an unemployment tax on most employers, which self-employed workers avoid. This tax does not come from paycheck deductions. Instead, employers pay it directly to the federal government based on the number of workers they employ. Federal unemployment taxes fund federal unemployment benefits extensions, which come into effect in some cases when states run out of unemployment funding or workers' benefits expire.
One form of unemployment tax that self-employed workers do pay is the federal Social Security tax. The self-employment Social Security tax is a flat rate tax the federal government imposes on self-employed workers in addition to their regular income tax. Self-employed people pay a higher rate on Social Security taxes than traditional employees pay through paycheck deductions. Employers of traditional employees contribute a portion of the Social Security tax on the employee's behalf, but self-employed workers pay both the employer and employee share of the Social Security tax. Because they fund Social Security, self-employed workers are eligible to receive Social Security disability benefits while unemployed as a result of a disability.
Self-employed workers may save money by not paying some forms of unemployment taxes. As regular employees they would pay more through paycheck deductions, and as employers they would pay through federal taxes. However, not paying into unemployment insurance programs means self-employed workers who lose their source of income or experience seasonal unemployment are offered no financial assistance from the government to pay for necessities and manage debt. The only situations unemployed workers can expect unemployment benefits is if they become disabled or after they reach eligibility age for Social Security retirement benefits.