When couples divorce, often there are ongoing support obligations. One spouse may be entitled to spousal support or, if the couple has minor children, child support will be awarded. The amount of spousal support and child support is calculated based on a statutory formula that looks at the income of both parties. When a spouse works for someone else as an employee, it is relatively easy to verify their income from work. However, determining income when a spouse is self-employed is more complicated than just looking at a W-2.
The general rule for self-employed individuals is that their income for purposes of calculating support is equal to their gross total income less FICA (Federal Insurance Contributions Act) payroll taxes. FICA taxes are paid to the federal government by both the employee and employer. Each pays half (7.65%) for a total of 15.3% of gross wages. However, self-employed individuals have to pay both the employee and employer portion, so the entire 15.3% is deducted from their gross income when calculating spousal or child support.
In addition, self-employed individuals are allowed to deduct reasonable business expenses from their gross income with some exceptions. For example, they cannot deduct travel and entertainment expenses or depreciation on assets. However, they can deduct local or city taxes from their gross income.
An issue that is more likely to arise with self-employed individuals in divorce is whether that spouse is hiding income. A business may provide opportunities for a spouse to conceal revenue or inflate business expenses to minimize support payments. If there are suspicions that this is occurring, it may be beneficial for the other spouse to hire a forensic accountant to help determine if money is being hidden or funneled to an unknown account. A forensic accountant can trace personal and business income in addition to auditing expenses to uncover possible fraud or other questionable activity.
Spousal and child support issues in divorce can be complicated so it is important to hire an experienced attorney to help you through the process and protect your interests. If you are considering a divorce, contact us for guidance on how to get the best result in your case.