Last time we talked about the basics of why gross income is used instead of net income and now we will talk a little about how to calculate it.
Calculating gross pay is normally very easy: we look at your year-to-date pay stub or your most recent W-2 and do some math to come up with a monthly average. This usually evens out any spikes in pay for overtime or things like that. For most people that is the end of it, but the process is different for self-employed individuals.
Self-employed parents still need to have their income included in the support calculation, but it is not as simple as just looking at how much their business made. That business has expenses and the self-employed parent should be allowed to deduct certain expenses from the gross income before putting it into the support calculation. For example, if the business has employees then their salary would be a deductible expense for support purposes. Similarly, if a business buys materials for $90 and turns them into widgets that it sells for $100 then although the business made $100 on those sales, only $10 is really income. There are many examples of allowable deductions but the most important thing to keep in mind is this: just because something can be deducted for federal tax purposes does not mean it can be deducted for child support purposes, and vice versa. There will be a lot of overlap between the two sets of deductions but they are not all the same.
Combing through business expenses is a difficult and time consuming process, but oftentimes necessary. A self-employed parent might claim, for example, that they only actually make $2,000 per month. On looking through their business records, though, you might see that the business is paying for their mortgage, their personal car loan, their personal credit cards, their food, etc., and the $2,000 per month is pure fun money. All of those personal expenses need to be recaptured for the support calculation—and probably for the taxes, but that is beyond the scope of this post—so that the correct amount due can be determined. This can make a huge difference in the amount of support that is paid, as the above example probably shows.
Please enjoy this disclaimer: The content of this post, indeed of all of my posts, is intended to reference only Virginia law. I am writing this blog to give some idea of the complexities that can underlie family law issues in Virginia and in no way am I giving anyone legal advice here. While I hope these posts will be informative, no one should feel entitled to rely on the information presented here as an authoritative source. Anyone facing a legal issue is well advised to speak to a lawyer face to face to discuss the specifics of that case, rather than relying on general information found on the internet.