Determining your income is an important part of the child support equation in a Texas divorce. Financial issues are dependent on figuring out how to maximize the opportunities that you have as a business owner to measure your income and the status of your business as far correctly and accurately as its value is concerned. When you are operating a business, these are the sort of details that may get lost in the day-to-day operations. You probably do not stop to think daily about what you took home from the business as far as income or what your business is worth. However, these are two questions that become important in a divorce given the potential child support payments you may owe as well as determining how to divide your business as part of the community property division.
For a small business owner such as yourself, determining your income means more than taking into consideration what your "salary" would be if you were an employee at your business or company. In Texas child support calculations, bonuses, commissions, tips, and rental income are all relevant factors to consider in addition to your rate of pay, salary, or the amount of money you bring home from your business. This is true for all people who go through a divorce, but it is especially true for those of you who own and operate a small business. You need to be especially vigilant about how your income is calculated and what sources of income are counted when it comes to that process.
Keeping accurate records of your pay, and your various streams of income and then being able to organize the proof of these income streams are all important as you get into your divorce. You can come up with whatever numbers you want as far as income is concerned. However, you can bet your bottom dollar that your spouse is going to call your bluff and ask how you are coming up with those figures. You need to prove to your spouse what your income is. If she is not convinced, then your roof needs to be good enough for a family court judge to be convinced. That should put you in a position where you can prepare well enough for a trial, hearing, or settlement negotiations.
Depending on the type of business that you operate there will be different issues and circumstances which need to be dealt with. If you are someone who sells a product out of a traditional brick-and-mortar storefront, then your income will probably be calculated differently than an entrepreneur who operates a technology startup of some sort. The man selling hot dogs and hamburgers will need to turn a profit quickly to stay open. On the other hand, if you are a technology star then it may take you years to reach a point where your business is profitable. However, you may have inputs and other considerations that can show that your business is already worth more than the restaurant down the street which opened at the same time as your business.
When we attempt to calculate income in various businesses we need to be able to get a firm idea of what the inputs and outputs are in your business as well as how consistent your income is. Some businesses are seasonal. Some businesses depend upon the overall economic conditions of the country to a great extent. For example, if you are a mortgage broker then right now may be a tough time for you considering the economy (by many measures) is not doing that great. Certainly, the real estate market is not on fire like it was in 2021 and 2022. This is an incredibly important factor for you to consider as you begin to think more about how your income is going to be classified and quantified for child support purposes.
Income will also depend upon how your business is set up and what method you all use to account for profits and losses. Tax forms are the first place you and your spouse should look to when you are trying to figure out your income as a business owner. The way that you handle tax-related issues will differ depending on whether you are a solo entrepreneur, corporation, LLC, or partnership. There are various methods of accounting that you may have chosen to implement for your business depending upon the type of business that you operate. This may be a good time to get with your bookkeeper, accountant, or another tax professional to discuss this issue. He or she may have a good idea as to what documents may be helpful when it comes to your trying to figure out how to calculate your income for child support purposes.
The more in touch, you are with the financials of your business the better off you will be when it comes to calculating income for yourself in a divorce scenario. I say this because some people start a business who know very well how to sell a product, manufacture something or otherwise provide a good or service that is desirable in the national and regional economies. However, what these folks may not know how to do is run a business. There are so many factors and issues to bear in mind when it comes to a small business that it is not enough to simply know how to sell or know how to create. Rather, the people that succeed in business are those who can combine entrepreneurism with a desire to run a business well. There is a sweet spot that can be found. If you can find it before your divorce, then your business and your divorce will benefit from your having done so.
Methods of calculating child support for an entrepreneur
The first method of calculating child support for an entrepreneur looks back at the past several years of your income. Or, if your business has not been operating that long- the last few years of operation to figure out how your income has looked over this period. How much did you pay yourself over the past year or five years out of your business? From that, you can divide by the total number of months to come up with a monthly income. For example, if you took $100,000 out of your business as an income last year then you would take that $100,000 and divide it by 12 (the number of months in a year). This does not take into consideration taxes and other expenses. Just figuring out the gross numbers can put you in a good position to find out how to eventually calculate your net monthly income.
This is a simple method to use but it is not without its shortcomings. For one, this is a tricky method to use in that you may be oversimplifying things a tad. If your income tends to go up and down a lot throughout the year, then it may be difficult for you to say that you have an average income of an "X" number. Some months you may earn so much more than other months that calculating an average does not tell you much. If you utilize this method, then you may need to save up during those months when you make more money to compensate for those months when you will not earn as much but will still need to pay the same amount of child support. If you are not a good saver and know that you struggle with planning, then there may be another method that you need to consider as far as child support calculations are concerned. However, you should consider how you can begin to save more effectively as you lean into your post-divorce years.
Another issue to consider with your income is that it is likely to decrease in the months following your divorce, at least in the short term. There are going to be times when you cannot devote as much time to your business as you would like both during and after your divorce. You will be trying to get your feet back under you after the divorce but will also be spending more time with your children and learning the ropes of a new schedule for yourself. These are not factors that will necessarily help you earn more money from your business. As a result, it could take some time for you to begin to earn as much money as you did before your divorce.
If you are so inclined and have the financial strength to do so, you may decide to hire an expert who can investigate the financials of your business to help you determine a realistic outlook for income. Where the market is headed for your business, what your income has been over the past few years, and the trajectory of your business will all be utilized when it comes to calculating income.
A divorce means a disagreement between spouses
It should be expected that you and your spouse will engage in some degree of disagreement throughout your divorce. This does not mean that you all are going to be in for the type of divorce that you see portrayed in movies and television shows where the spouses never stop fighting. However, it does mean that most divorces find spouses arguing or disagreeing on various subjects from time to time.
As I mentioned a moment ago, it would be surprising if your spouse did not argue that you made more money than you do. In the same way, it would be surprising if you did not argue that you made less or about the same as you do. This does not mean that you don’t love your child or want to provide for him. However, paying child support is not how most parents want to support their children. Your preference is probably to pay your child's expenses directly rather than to go through your ex-spouse. However, that is not the way the child support system is set up in Texas.
When you and your spouse cannot agree on how to calculate your income then you have a situation that is perfectly set up for the two of you to bicker and go back and forth on this subject with one another. That doesn’t mean that the whole divorce is going to be this way. However, what can prove difficult is that you all are going to need to get past this important subject to arrive at other issues that you have more common ground.
Hiding income is a good way to pay less in child support and can also lead to your paying less in a property division scenario. You can take your income and hide it through loans to close family members who will simply pay the money back to you right after your divorce comes to an end. The money can be kept as retained earnings and pulled out as soon as the divorce is over. If you have high expenses in your business, to begin with then you can even overstate these further to make it look like your business is less profitable than it is and justify the low income that you are claiming for child support purposes.
There are downsides to manipulating your income and the financial status of your business beyond the impact on your child and the moral compromises that you may need to make to do this. Having your spouse or a judge figure out what you are doing is the most obvious reason why you probably do not want to artificially reduce your income or profits for your business in a divorce.
Another issue that you may have to sort through in your divorce as an entrepreneur is any unreported income that you may have. If your business is a cash-heavy business that results in you having a lot of cash on hand then you may not have reported all that income for any number of reasons. The inverse of this would be to list on paper that your expenses are hiring more than they are to artificially lower your profitability and make it appear that your earnings are less than they truly are. Overall, there are several ways to hide income and otherwise make it appear that you do not earn as much money as you do. This can be a problem for people in a divorce who are trying to get to the bottom of both the valuation of a business and income for child support purposes.
What some people forget is that your lifestyle can be looked at to determine your income level. You can make it appear on paper that your income is low but if someone were to take a deep dive into your lifestyle and habits that myth could be dispelled quickly. That your income is relatively low may be one thing but if your mortgage payment is expensive or you send all your children to private school then that can quickly tell someone that you have a more extensive income than the numbers say on paper.
A look at your bank account can help disclose what your income level truly is. What you spend your money on can be hidden from plain view, but your bank account will not lie. Your spouse’s attorney can likely discover income like this through discovery. If you are truly working hard to hide income like this, then a forensic accountant may be brought in to figure out where the money is going and whether your income is as low as you indicate that it is.
There are consequences beyond the divorce court that you could face for falsifying your income. For instance, if you are lying about your taxes then I don't need to mention that there are consequences for doing this. Getting fined by the IRS or even having to go to jail in certain instances is possible. You need to think long-term when it comes to your behavior with income and profits in your business during a divorce. The future of your business, your future as a provider for your children, and a host of other concerns that we have covered today are possible outcomes if you are trying to cover up income or fudge the numbers for your business.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family's circumstances may be impacted by the filing of a divorce or child custody case.
