Unemployment can raise federal and state taxes for small businesses. At times, it presents administrative challenges for employers when handling former workers' claims for unemployment insurance benefits. On the up side, however, unemployment can increase the number of businesses by offering opportunities for new entrepreneurs. The Federal-State Unemployment Insurance, or UI, fund provides temporary financial assistance to workers who involuntarily lose their jobs.

Weakens Consumer Buying

People have less money to spend on goods and services when they’re out of work. High unemployment weakens consumers’ purchasing power, the driver of local economies. Bakeries, neighborhood retailers, local banks, landlords and other small businesses feel the sting of high unemployment when people stop eating out, buying goods or paying their rent.

Raises UI Taxes

An economy with high unemployment can leave cash-strapped states looking to borrow money from the federal government to cover UI benefits claims. As a result, small businesses, which disproportionately face financial hardships in recessionary times, might have to pay higher federal unemployment taxes, or FUTA. Employers pay a percentage of their total payroll for FUTA. A rate increase would be on top of the state unemployment tax, or SUTA, that businesses also pay.

Layoff Penalties

Small-business owners who have had multiple layoffs can expect to pay higher UI taxes. Tax rates vary by state, but employers that never or rarely lay off workers are charged a smaller percentage of their total payroll than those with a long history of layoffs. A small employer’s financial stability is jeopardized when a sizable number of its former employees are filing UI benefits claims.

Burdens Claims Handling

Handling UI benefits claims can be as confusing as it is burdensome for small-business owners. They might not know how they’re being taxed or if a laid-off employee is still eligible for benefits. Employers can avoid unexpected challenges by knowing their state’s UI laws. State labor departments can clarify what types of terminations make workers eligible to collect benefits and for how long. State DOLs also notify employers when claims are filed and request their input. Employers should keep records of their tax payments and document all UI charges against them. They also should be ready to challenge benefits claims they believe are false.

Encourages Entrepreneurship

Labor departments nationwide encourage laid-off workers to start their own businesses. State DOLs even provide resources to help them, such as entrepreneurial workshops and information on registering a business and applying for loans. These self-employment assistance programs pay would-be business owners stipends instead of UI benefits while they’re setting up their companies. But to participate in these programs, unemployed workers must still qualify for their state’s UI benefits.

States generally disqualify people who work full time from collecting unemployment benefits, whether they work for themselves or someone else. However, states sometimes allow the unemployed to start a part-time business and collect partial benefits.