The first step in the child support calculation process is to determine the payor’s gross income for child support purposes (“GICSP”). When the payor is simply an employee, GICSP is fairly easy to calculate and there’s not much room for shenanigans. However, when the payor is a sole proprietor or business owner, GICSP can be quite tricky to calculate and the payor can use several strategies to reduce his GICSP (and thus his child support obligation) without losing the benefit of the income.
Consider the following typical example:
John Doe is a sales consultant for a large local electrical supplier. He is treated as an independent contractor and paid a flat rate of $8000 per month. It would be tempting to use that gross number of $8000 to begin calculating John’s net income for child support purposes. But John does business as John Doe Sales, LLC, and the $8000 monthly check gets deposited into the LLC’s bank account. John doesn’t receive all $8000 as income from the LLC, so his GICSP does not equal $8000. Instead, John elects to pay himself a salary of $2000 monthly. Additionally, John has the LLC pay his car note, cell phone and car insurance which total $1000 per month. The LLC also has other pure business expenses of $2000 per month.
At the end of each month, John distributes $2500 to himself and leaves the remaining $500 as savings. John would prefer to argue that his GICSP is equal to his salary of $2000 and his LLC distribution of $2500, or $4500 in gross.
Jane Doe would prefer to argue that John’s GICSP is $6000 per month, based on his $2000 salary, his $2500 distribution, the $1000 in John’s personal expenses paid by the LLC, and the $500 in retained earnings that John left in the LLC.
Most attorneys and courts would agree that John’s pure business expenses are not going to be included in John’s GICSP. However, it is important to note that depreciation will only be allowed to the extent it represents an actual decrease in value of a particular asset.
In a dispute like the one between John Doe and Jane Doe, a court will frequently split the difference between the two argued amounts, fulfilling the court’s unofficial duty of making sure nobody leaves the courthouse happy.
As always, if I can help answer any questions you might have about child support in general, or self-employed payors in particular, please call on me anytime. I can be reached on my cell phone at 501-519-0186, or at the office at 501-222-7378, or by email at email@example.com.
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