Child Support Series: Self Employment Income

In Massachusetts, the Commonwealth's child support guidelines are reviewed and revised every four years, at which time the child support task force examines issues with child support calculations, amendments in the percentages of payments by parties, and extraordinary situations that may affect the payment of child support. In evaluating the most recent changes, effective September 15, 2017, we are presenting a series of articles outlining the most significant changes to the guidelines.

Part II: Self Employment Income

The child support guidelines state that the court shall include income from all available sources, with some limited exceptions. However, income from self-employed individuals are often problematic with regard to what constitutes income to the individual and what should be an included business expense. The child support task force has attempted to clarify these guidelines relating to self-employed parties. The guidelines define income as "income from self-employment, rent, royalties, proprietorship of a business, or joint ownership of a partnership or closely-held corporation is defined as gross receipts minus ordinary and necessary expenses required to produce income."

While revenue into a business is generally simple to determine, what constitute reasonable expenses are often hotly debated. Judges are required to carefully review the claimed expenses to determine which are necessary for the production of income, and not necessarily for those that can be taken for Federal tax deductions. In particular, the guidelines specifically state that any depreciation taken as a Federal tax deduction cannot be considered an expense for child support purposes. Further, the court may consider any non-distributed income from a S corporation or other entity to a parent shareholder. This would preclude a party from taking a small income as a salary and holding earnings in the business as profits for the purposes of lowering their child support obligation. Finally, the task force included rental income into the category of self-employed income in conjunction with recent case law that states that a parties earnings from rental income should be included for purposes of child support calculation even though the rental property can or has been divided as a marital asset.

The determination of income from a self-employed party is often more difficult when considering what is actual income to that party. It is not uncommon for parties to use the business to pay for personal expenses and attempt to claim those as business expenses, or to maintain income in the business account in order to reduce the appearance of income.

Another common issue is parties who are paid in cash, or "under the table," and show no actual income from which to base the child support. In those situations, the court may consider the expenses the person pays and standard of living, as a basis to impute income to the individual based upon their lifestyle. It is helpful to know the person's expenses such as rent, car payment, and entertainment costs.

As these issues of business income and unreported income can become very complicated, it is important to have an experienced attorney to obtain and review the documents in order to present as much information as possible to the court to support your position. Contact us today so we can help evaluate your situation.