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Child Support: Hidden Income & the Self Employed

Child support calculations in all States are heavily dependent on the income of the parents.  While the income for W2 employees can be relatively straight forward, calculating the income of the self-employed can be substantially more difficult.

A self-employed parent may seek to minimize his income, and therefore child support payments, but hiding his income in his business.  This can mean substantially less support for the child.

An analysis of the income of a self-employed parent’s income must begin with his or her business tax return.  Below are four common places to spot hidden income:

  1.  Office Expenses:  Office expenses are a “catch all” category for purposes of tax returns.  But are the expenses listed really expenses for the business, or are they personal expenses masquerading as business expenses?Look for high dollar items when combing through bank statements.  A common example is writing off a trip and hotel stay as a business expense when it is truly for personal reasons.  Such a trip could be thousands of dollars a year in income missing from a child support calculation.

  2. Home Office Expense:  Like the office expense, “home office expenses” is a common place to hide income.  Furniture or computer equipment purchased for the home or entertainment of the payee parent can be written off as home office expenses for the business. A strong understanding of the purpose of the business at issue is imperative to analyzing the validity of the home office expenses.

  3. Advertising:  Is there a boat other expensive piece of personal property that is in the business’s name?  Check to see if they expenses associated with the property are being paid under the business.  A strange but repeat occurrence is the small businessmen who buys a boat in the businesses name, names it after his business or line of work, and claims it as a business expense.Not uncommon, but equally outrageous:  Watch for the self-employed who records a check to a “big national advertising paper”, when in reality, the parent is writing the check to himself.  Such fake advertising can allow the self-employed to pass large chunks of cash to him-self personally without paying taxes and while keeping it off the books.

  4. Wages:  Check the standard of living of the payee spouse.  Does he have a maid, lawn-care service, or other laborers who work on his home or other personal property?  If so, then check to see if these workers are paid through the parent’s personal income or through the “business”.  If they are paid through the business, then adjustments need to be made to the income of the payor spouse (and his business) to reflect true income.

 

We have had a lot of success in handling complex divorce cases where the spouse is a business owner or self-employed. If you have questions regarding divorce in Arizona and a self-employed spouse, give us a call at (602) 254-8880 to start your free consultation. If you’d like, you can send us a confidential email at your convenience.

 

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