Child Support for the Self-Employed
This guide will give you some basic concepts to be aware of when dealing with child support when a parent is self-employed.
Getting StartedIn Minnesota, calculating child support requires a determination of the income of BOTH parents, regardless of which parent pays or receives child support. Calculating child support for a parent that is self-employed is far more complicated than simply using the paystubs that may suffice for the traditionally employed parent. The information you need includes AT LEAST the following: 1) tax returns with all attachments and schedules; 2) reliable documentation of gross receipts for the business; 3) reliable documentation of the costs of goods sold; 4) documentation of business related expenses claimed; 4) detailed income and balance sheet statements for the business; 5) knowledge about who is responsible for putting together the financial statements for the business (particularly the income statement and the balance sheet); and 6) documentation sufficient to identify what particular expenses are claimed - as compared to summary documentation that might simply state "utilities = $3,750." A family law attorney will be required in order to properly use the documentation to assess what income should be used for the self-employed parent. In more complex cases, it would be wise to obtain the assistance of an accountant in order to have expert feedback on what expenses are being claimed and how they are being claimed.
Taxable Income vs. Child Support IncomeTax returns (including all attachments, such as W-2's, 1099's, Schedule C's, etc.) are essential in properly determining the income of a self-employed parent. However, the tax return is NOT the determining factor of income because there are deductions allowed by the IRS that are NOT allowed for the purposes of calculating income for child support. The most common example of income that may not be easily identified on a tax return but still needs to be ADDED back into the self-employed parent's income for child support consists of "in kind benefits" that actually REDUCE necessary personal living expenses for the self-employed parent. For example, if the self-employed parent has a car in the name of the business, but no personal vehicle, than that "benefit" needs to be assigned a dollar amount and then added into the self-employed parent's income.
Getting Reliable DeterminationsWhen a parent is self-employed at a very small business (perhaps they are the sole employee or worker of the business), it is common that the self-employed parent is also the one assembling the "books" and other numbers necessary to calculate child support income. Often these parents may have a special skill that helps them at their business, but they may be untrained or unorganized in the area of bookkeeping. The reality is that this may require more legal work and expense in order to adequately determine accurate numbers. This extra effort may include depositions to question the parent about expenses claimed, or hiring an accountant to review the parent's business books. In the end, you will want to consult with a family law attorney to get a fair idea of whether or not the child support income is adequately reliable.
Final ProcessThere are several pitfalls and potential errors that can occur in calculating income of the self-employed parent. In the end, the process is relatively simple to summarize. Start with the gross receipts, then subtract the costs of goods as well as the reasonable and necessary business expenses. However, although this is easy to summarize in a sentence, it is wise to retain counsel to make sure this "easy" process is done correctly.