How is child support calculated if a parent is self-employed?

The North Carolina Child Support Guidelines are pretty straightforward; if you spend any time on our child support calculator, you’ll notice that much. Once you input each parent’s income and number of overnights you can have a good idea of what your child support obligation may be. But what happens in cases where income is hard to determine? This is certainly the case for self-employed individuals.

Self-employment can take many forms. You may own a business that employs 100 people, or maybe you own a restaurant, or rent a booth at a hair salon. Maybe you do freelance work or are in the early stages of developing a tech startup.

Whatever self-employment looks like for you, you’re probably wondering how your income will be determined for purposes of child support.

Or, maybe the other parent is self-employed and you have concerns that his or her income will be underestimated or difficult to ascertain.

What do the Guidelines Say?

The North Carolina Child Support Guidelines directly address income from self-employment as follows: “Gross 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 for self-employment or business operation.”

Basically the guidelines provide a formula: money made from the business venture subtracted by money required to operate the business. Apply that formula and you’ll arrive at the magic number the guidelines utlize.

The formula certainly takes some of the guesswork out of the analysis. By using a revenue versus expense approach, it includes revenue or profits even if the income is not actually disbursed or taken by the self-employed parent. In other words, it makes it more difficult for a self-employed parent to depreciate his or her income simply by not taking disbursements or certain profits to try and depress income.

Some Expenses Excluded

Certain expenses are expressly excluded by the North Carolina Child Support Guidelines. For instance, certain amounts allowed by the IRS related to depreciation and investment tax credits are excluded. Further, North Carolina courts have been known to exclude other business expenses from the aforementioned formula in the interest of fairness. For instance, courts have disallowed expenses for utilities, telephones, vehicle leases, insurance and maintenance, and other expenses if the self-employed parent would have incurred them regardless of operating the business.

As you can image, balancing revenue and expenses is often easier said than done, as such, the courts are given wide discretion in deciding which expenses are truly necessary expenses that should be deducted from the revenue received by the self-employed parent.

How do you obtain evidence of revenue and expenses?

If you are the self-employed parent you’ll need to make sure you keep track of these revenue and expense documentation for several reasons. First, it will help you in determining what your potential child support obligation will be. Second, it will make it easier for you to compile this information to provide it to the other parent if you have everything organized. If the other parent has filed a lawsuit related to child support, you’ll be required to provide this documentation, so you may as well have it handy.

If you are the parent in need of this information, you can get access to it several ways. First, you can simply request it from the other party. If you are amicable, he or she may simply hand it over. If that isn’t the case, don’t fret, the self-employed parent will be required to provide these these disclosures pursuant to the rules of civil procedure and local county rules once a lawsuit for child support has been filed. If you believe the other parent still has not disclosed all necessary documentation, or may be trying to depress his or her income, you can as for further documents and answer to questions through the discovery process.

In sum, it can be more difficult to ascertain a true income for a self-employed parent. The formula does provide a good framework, but you’ll also need to consider that the judge is given wide discretion in determining what should be considered a true business expense.

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