SELF EMPLOYED SEEKING UNEMPLOYMENT INSURANCE?

Generally, under New York law, the Department of Labor will not allow business owners and independent contractors to collect unemployment benefits even though they do not earn compensation. As long as an employee is working as a business owner, even without remuneration or profit, New York law considers him employed.

MATTER OF LASKER v. Commissioner of Labor, 2017 NY Slip Op 7924 - NY: Appellate Div., 3rd Dept. 2017:

"Claimant was president and a 50% shareholder of a corporation engaged in the check cashing business. The business was sold in November 2010, payable in 72 monthly installments, and the name of the corporation was changed. Claimant filed a claim for unemployment insurance benefits effective February 21, 2011 and began receiving benefits. The Department of Labor thereafter found that claimant was ineligible to receive unemployment insurance benefits, effective from February 21, 2011 until the reason for his ineligibility no longer exists, because he was not totally unemployed during the time that he received benefits, and charged him with recoverable overpayment, reduced his right to receive future benefits by 704 days and imposed civil penalties. Following a hearing, an Administrative Law Judge found that claimant was ineligible to receive benefits from February 21, 2011 to December 11, 2012, but otherwise upheld the Department's determinations. The Unemployment Insurance Appeal Board affirmed, and claimant now appeals.

We affirm. "[W]hether a claimant is totally unemployed for purposes of receiving unemployment insurance benefits is a factual question for the Board and its determination will be upheld if supported by substantial evidence" (Matter of Robinson [Commissioner of Labor], 125 AD3d 1038, 1039 [2015], lv dismissed 26 NY3d 953 [2015]; accord Matter of Roberson [Commissioner of Labor], 142 AD3d 1259, 1260 [2016]). "[A] corporate officer who performs activities in connection with the winding up of a corporation will not be considered totally unemployed, even if his or her activities in this regard are minimal" (Matter of Bigelow [Commissioner of Labor], 13 AD3d 1022, 1022-1023 [2004]; see Matter of Bunting [Commissioner of Labor], 61 AD3d 1229, 1229-1230 [2009]; Matter of DeAngelo [Commissioner of Labor], 54 AD3d 468, 468 [2008]; Matter of Downton [Commissioner of Labor], 45 AD3d 1088, 1089 [2007]). Following the sale of the business, claimant took measures in winding up the business during the time period in question, including changing the company name with the Department of State as required by the purchase agreement, distributing the monthly installment payments received from the purchaser of the business, and writing checks from the company account for accountant and counsel fees, taxes, insurance costs, a charitable contribution, office supplies and other business expenses. Under these circumstances, the Board's determination that claimant was not totally unemployed is supported by substantial evidence and will not be disturbed (see Matter of Bunting [Commissioner of Labor], 61 AD3d at 1229-1230; Matter of Downton [Commissioner of Labor], 45 AD3d at 1089). "Contrary to claimant's assertion, actual financial gain is not a prerequisite to a finding that a claimant is not totally unemployed" (Matter of DeAngelo [Commissioner of Labor], 54 AD3d at 469 [citation omitted]; see Matter of Rance [Hudacs], 196 AD2d 930, 930 [1993]).

To the extent that claimant challenges the finding of a recoverable overpayment and the assessment of penalties, the record reflects that claimant denied working as an officer of a corporation in his application for benefits, despite signing the purchase agreement as the seller's president and being listed as the corporation's chief financial officer of the renamed corporation with the Department of State. Further, he did not report any of his activities in winding up the business when certifying for benefits. Accordingly, we decline to disturb the Board's finding that claimant made willful false statements in order to obtain benefits and was therefore subject to a recoverable overpayment and penalties (see Matter of Connell [Commissioner of Labor], 82 AD3d 1437, 1439 [2011]; Matter of Bunting [Commissioner of Labor], 61 AD3d at 1230)."

UNEMPLOYMENT INSURANCE - SELF EMPLOYMENT

A few recent consultations have revealed that there may be an issue of whether, among other possible facts, the maintenance of a blog or website or other social media group constitutes self-employment and thus disqualifying UI benefits. Here is a story reported from Forbes just a few months ago but and one must remember that each case has its own peculiar facts:

"Blogger's Unemployment Benefits Reinstated After AdSense Fiasco
David K. Randall, 10.15.09, 4:00 PM ET

A blogger who lost her unemployment benefits after making a dollar a day through Google AdSense had her weekly checks restored yesterday. The New York Department of Labor reversed its stance that her blog constituted work, but it still does not have a policy for how to classify blogging that produces income.

As Forbes first reported, Karin, a 2008 graduate of the University of Virginia School of Law, applied for unemployment benefits after she was laid off by a New York City law firm six months into her job. She started a food blog to build a writing portfolio in hopes of attracting employers and made $238.75 over six months through Google AdSense, a service by the Web search company that pays bloggers to host ads on their Web sites.

When she reported this income to the New York State Department of Labor, she received conflicting advice about whether this income constituted work.

According to state regulations, anyone receiving unemployment benefits who works one day and earns less than $405 will have his check reduced by 25%. However, the state does not regard "residual income"--meaning payment for services previously rendered--as work that would affect a person's eligibility for unemployment benefits.

The state suspended Karin's weekly unemployment payments while it conducted an investigation into her "business," and Wednesday determined that the income was indeed residual.

"When the claimant brought the issue to the department's attention, the department went through the normal process to determine if the claimant was involved in any business activity," a Department of Labor spokesperson said. "Based upon the responses, it was determined that the income received was "passive" income and not directly related to a business activity, which is why her benefits were reinstated."

One key to the state's ruling was that the blog was essentially written as a form of self-promotion rather than being a for-profit enterprise. If Karin accepts money from restaurants in exchange for writing about their establishments, however, her blog will be viewed as work in the state's eyes, and she could become ineligible for unemployment benefits.

Karin says that the Department of Labor told her that she no longer needs to report her AdSense income. However, she is waiting to receive a guarantee in writing before she puts ads back up on her site."

UNEMPLOYMENT INSURANCE - SELF EMPLOYMENT

A common question, and one that came up recently, is this: can a business owner collect UI benefits once the business is over. There is some law on this but I found one case that basically illustrates the rules and requirements for a business owner to collect:

"MENKOV v. COMM'R. OF LABOR, 62 A.D.3d 1193, 882 N.Y.S.2d 315 [3d Dept 2009]:

Appeal from a decision of the Unemployment Insurance Appeal Board, filed December 28, 2007, which, among other things, ruled that claimant was ineligible to receive unemployment insurance benefits because she was not totally unemployed.

Before: Mercure, J.P., Rose, Malone Jr., Stein and Garry, JJ., concur.

Claimant was the sole owner and officer of Danam Computer Services, Inc., which was created in 1996 to further her work as a computer consultant. In 2003, claimant made the decision to dissolve Danam and look for other employment. Claimant did not actually dissolve Danam until 2006, however, and completed additional projects through it from 2003 to 2005. Nevertheless, claimant applied for and received unemployment insurance benefits for two periods in 2003 and 2004. The Unemployment Insurance Appeal Board concluded that claimant was not totally unemployed and was ineligible to receive unemployment insurance benefits for either period. The Board further concluded that she made willful misrepresentations to obtain benefits and charged her with a recoverable overpayment pursuant to Labor Law § 597 (4). Claimant appeals.

"It is well settled that a principal of a corporation who performs activities on its behalf, even if minimal, will not be considered to be totally unemployed if such individual stands to benefit financially from the corporation's continued existence" (Matter of Ellison [Commissioner of Labor], 57 AD3d 1194, 1194 [2008] [citations omitted]; see Matter of Thomas [Commissioner of Labor], 58 AD3d 1099, 1099-1100 [ 2009]). Here, claimant did benefit financially from Danam given the projects she performed through it during the period in question. Moreover, she was a signatory to Danam's checking account and signed checks on its behalf for a variety of purposes, including for the purpose of repaying alleged loans made by her to Danam, for medical insurance expenses and as reimbursement for business expenses. Given the foregoing, substantial evidence supports the Board's conclusion that claimant was not totally unemployed (see Matter of Chirico [Commissioner of Labor], 49 AD3d 1104, 1105 [2008]). Substantial evidence also supports the Board's determination that claimant is liable for recoverable overpayments, particularly given her false representation on both applications that she was not a corporate officer (see Matter of Wood [Commissioner of Labor], 43 AD3d 593, 594[2007]).

Ordered that the decision is affirmed, without costs."

It would thus appear that a complete liquidation and legal dissolution of the business is required.

UNEMPLOYMENT INSURANCE - SELF EMPLOYED

Recently, I saw an article which I will repost here which I will discuss later in terms of how, when you have a deductible hobby, you may be deemed "self -employed" and thus ineligible for unemployment benefits:

"Ten Tips For Deducting Your 'Hobby', Robert W. Wood, Here's how to keep Uncle Sam from claiming your small side business is really a hobby.

Will the IRS pay for your hobby? The short answer is: No. But the more nuanced answer is: "Yes, Uncle Sam will sometimes subsidize your hobby." If, that is, you make it into enough of a real business.

If you want to avoid any IRS hassles, my standard advice is to keep business and personal pursuits purely separate.

But that doesn't work for everyone. We live in a multipurposing culture. When we travel for business, we try to make it a vacation, too, by tacking on extra days at the end or squeezing in some golf or sightseeing between meetings. When we buy a new car, we want it to handle both family trips and office commutes. Today's economic and time demands make multipurposing even more compelling.

Moreover, Do What You Love, The Money Will Follow, isn't just the title of a classic self-help book by psychologist Marsha Sinetar: It's a way of life, and a much talked about one these day. Guy Kawasaki lectures about it, and many others write, blog, speak and even proselytize it.

What does all that have to do with tax law? It raises the question: If you are passionate about something you do, can you treat it as a business on your tax returns?

This is not an idle question. If you lose $20,000 a year in the "business" of breeding, training and caring for whippets, then you can report that loss on a Schedule C and write if off against your salary on your Form 1040. Assuming your combined state and federal income tax rate is 40%, your whippet breeding will really only cost you $12,000, and Uncle Sam and your state will have subsidized your passion.

Read All Comments In Pictures: Convincing Uncle Sam To Subsidize Your Hobby

But you can only write off that loss if you are in the business of breeding--meaning the IRS believes you're in it to make a profit. If your whippets are a hobby, you can't claim a loss from breeding. You must still report any income from whippet sales, but you can only deduct your expenses from whippet breeding to the extent of those sales. Moreover those expenses must be claimed as miscellaneous itemized deductions, usable only to the extent they exceed 2% of your adjusted gross income.

Before you decide to turn your nondeductible hobby into a deductible business, be aware that this is an area of intense scrutiny by the IRS--so much so that last year it issued a new manual to help its agents ferret out taxpayers improperly writing off the costs of hobbies.

With that said, here are 10 tips for getting a more favorable business tax treatment for a pursuit you enjoy.

1. Match income and loss.

The IRS is unlikely to question whether you're engaged in a business if your income from an activity exceeds your expenses. If you make $20,000 breeding, showing and selling whippets but offset it with $20,000 of expenses, you net out at zero. You're still deducting all your expenses, but you're not offsetting them against other income--say, your salary or income from a medical practice. That makes the IRS less likely to complain.

2. Keep good records.


It matters whether you conduct yourself in a businesslike manner. If you keep good records, hold yourself out as running a business, etc.--that will help, no matter how unsuccessful you are at making a profit. Good record keeping is particularly important.

3. Show a profit three years in five.

If you can manage to eke out a profit three years out of every five (or two years out of seven, if your activity is horse breeding), the IRS will presume you're in business to make a profit. That presumption is worth a lot since you probably won't have to mud wrestle with the IRS over a more amorphous "facts and circumstances test" that looks at all the details of how you conduct your hobby/business. In fact, if you meet this presumption, the IRS can still argue that your activity is not engaged in for profit, but the burden shifts to the IRS to prove that the activity is not engaged in for profit. There have been tax cases where taxpayers have beat the IRS in court even though they made a profit only once in 10 or 15 years. But those are tough cases.

4. Plan income and expenses.

Our tax system is annual, and so are profit-and-loss determinations. You may have more control than you think over when you receive income and especially when you incur expenses. That control can help you make a profit three years out of five. You can legitimately bunch expenses by, for example, buying all your equipment in one year, rather than spreading your purchases over two, or by going to more whippet shows in one year than the other. You're less likely to be able to legitimately time your income, but you can sometimes time big payments by delaying sending an invoice, etc. (See "When You Have Income But No Cash.")

5. Delay a profits determination.

A special tax rule allows you to elect to defer the determination of profit motive until the fourth year of your "business," or sixth year in the case of an activity involving horses. To make this election you file a Form 5213, thereby postponing the determination of whether you've met the three-out-of-five-years profit presumption. The idea of the election is to give you time to ramp up and achieve a profit.

Warning: Most advisers don't recommend making this election. Why? It seems to invite audit by flagging the profit-motive issue. Plus, it has the effect of extending the IRS statute of limitations beyond the normal three years, so the IRS can examine all the years in question after the deferral period has passed. (For more about the IRS statute of limitations, click here.)

6. Do it full-time.

Most of the time the IRS goes after a taxpayer who writes off his or her "hobby" against other income from a regular job. If you work 40 hours a week in an office and raise chinchillas on the side, does that mean you have no profit motive and chinchillas are just a hobby? No, you can still have a business that is part-time. In fact, you can have multiple part-time businesses. Nevertheless, the IRS is more likely to consider an activity a business if you do it full-time.

7. Write a business plan.

This may sound silly, but the IRS looks for businesslike activity. One of the auditors' checklist items is a business plan. Write one up, whether or not you stick to it. Revise it periodically. Try to look business-like in all things. For example, the plan might include project goals, start-up costs, advertising, projected results, and parameters for discontinuing an unsuccessful venture.

8. Hire experts and become one.

The more expert you become in a field, and the more you engage other experts, the more business-like you'll look. If you have advanced degrees or otherwise have expertise in the activity, it looks less hobby-like. (If you don't have a degree, but do extensive research on an area, keep records of that research to prove the time and effort you've invested in it.) Similarly, if you hire an expert consultant to help you grow prize orchids, raise toucans, or race mopeds, you'll have one leg up on the ladder to convincing the IRS of your business status.

9. Don't enjoy it too much.

Another oddity relates to pleasure and enjoyment. Despite societal preoccupation with doing what you love, the IRS looks for elements of personal pleasure or recreation as one indication your "business" is really a hobby. If you enjoy what you do too much, it looks more like an avocation, and it may be treated as one.

10. Combine activities.

If a stand-alone activity produces losses, it may be more at risk of being treated as a hobby by the IRS. Yet if it can be combined with a profitable activity, the IRS might have no problem with it. The IRS says that your characterization of what constitutes a single activity will be accepted unless it's artificial and cannot reasonably be supported by the facts and circumstances. That means you can't combine your profits from your main work as a tech consultant with your losses from breeding whippets and report them as a single business activity. But if you have a profitable sideline selling handcrafted dog collars and have started up an unprofitable sideline boarding dogs, you may be able to combine the two on a single Schedule C, making it more likely that you'll show that profit three years out of five.

The bottom line.

As I noted at the start, my standard advice is to keep your business and personal life separate. But especially if you find yourself generating income from something that starts out as a hobby, it can make financial sense to consider becoming more businesslike and treating it as a business on your tax return. Just be sure you don't end up chasing tax benefits at the expense of turning an activity you once loved into a daily grind!

Robert W. Wood is a tax lawyer with a nationwide practice (www.woodporter.com). The author of more than 30 books including Taxation of Damage Awards & Settlement Payments (4th Ed., 2009), he can be reached at wood@woodporter.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional."

UNEMPLOYMENT INSURANCE - SELF EMPLOYED

A recent consultation revealed the following: Claimant ran a business on weekends as well as being full time employed on weekdays. The weekend business had income of over $10,000 and was operated as a corporation. Claimant's weekday job was terminated and Claimant applied for benefits but was denied on the grounds that Claimant was self-employed. This is from the Department of Labor website:

"The unemployment Insurance Law provides in Section 591 that benefits "shall be paid only to a claimant who is totally unemployed." Section 522 of the law defines total unemployment as "the total lack of employment on any day" and specifies that such employment includes "that not defined" in the Unemployment Insurance Law. This last mentioned specification has been interpreted by the Courts to mean that a self-employed claimant is not totally unemployed within the meaning of Section 522 of the law. This principle has been established by the Court in Matter of Emery (A-750-1207) and reiterated in Matter of Bunzl (A-750-1404). Following these Court decisions, it has been applied in rendering benefit determinations and in Appeal Board and Referee decisions. Thus, for the purposes of determining whether a claimant is totally unemployed, but for this purpose only, self-employment has the same significance as employment (as an employee) under a contract of hire. Neither these Court decisions nor the law define what is meant by "self- employment." Does it include any gainful work which an individual performs while not in an employer-employee relationship, however casual and sporadic such activity might be, including one-time undertakings, or however minute the effort and time which he devotes to it? Or does it require that the characteristics be present which commonly identify the existence of a going business, such as a physical establishment, continuous operations, sustained solicitation of customers, etc.? Is it necessary that a person, to be "self-employed" in this sense performs work in connection with the business or does it suffice that he is an owner or co-owner?"

UNEMPLOYMENT INSURANCE - SELF EMPLOYED

Another matter that I consulted on recently....Claimant was a part owner of a business. Claimant later sold interest in business but continued to work for several months with same business and then was unemployed. Claimant was receiving benefits but now the Department of Labor is seeking a return arguing that Claimant was not eligible due to self employment. The unemployment Insurance Law provides in Section 591 that benefits "shall be paid only to a claimant who is totally unemployed." Section 522 of the law defines total unemployment as "the total lack of employment on any day" and specifies that such employment includes "that not defined" in the Unemployment Insurance Law. This last mentioned specification has been interpreted by the Courts to mean that a self-employed claimant is not totally unemployed within the meaning of Section 522 of the law. Again, each case must be examined on a case by case basis.