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Divorce and Self-Employment- What You Need to Know

Divorce involves a bunch of financial calculations, including child support, division of property and debts, and sometimes maintenance. These are somewhat uncomplicated tasks if the parties both work jobs where they have a regular W-2 income, and if all they own is possibly a house, cars and household goods. This becomes much different if one (or both) of the parties is self-employed.

Why is it more complicated?

First of all, making an accurate determination of someone’s income becomes much more difficult if that person is self-employed. Even if they write themselves a paycheck, as a domestic relations attorney, I still have to look into which of that person’s expenses are being paid by the business. If you pay yourself a minimal salary each month but the business pays for your car, your phone or maybe even your mortgage, that is money that could be added back into your income since these expenses are being paid “for you”. If the person does not draw a paycheck, the Schedule C filed with the tax return is also not going to be an accurate picture of income until various expenses that are written off as tax deductible are added back in. In addition, the attorney may need to look at bank statements, profit and loss statements or even client ledgers to determine whether income has come in as cash and may not have been declared on the tax return.

In the discovery phase, it is likely that an attorney will need to look at 3 years of tax returns and other financial documents to be able to come up with an accurate picture of a self-employed person’s income.

The other complication with self-employment is that the business may be considered to be a marital asset. In that situation it will need to be valued, likely by a CPA, and the value may be divided between the parties. Marital money that has gone into the business may need to be paid back to the marital estate if it was documented as a loan as well.

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