Is my Self-Employed Ex Hiding Income and Assets?
Child support and alimony can be difficult to collect, especially when an ex tries to hide his or her assets. Some spouses may discover that business owners hide assets and profits in their businesses just to avoid paying the right amount of child support or alimony. This becomes even more difficult to notice the longer two people have been separated, because over time people may quit jobs, move around, start or close businesses, and obtain pay raises, all of which they may not report. There are several key considerations when trying to collect from an ex who is self-employed.
Self-Employment Income Is Different
When you work for someone else, you usually receive a W-2. This means that the employer has already withheld your taxes and paid them to the IRS. They have paid your share and their share of employment taxes and income taxes to the federal government . Thus, when you get your check, all that remaining money is yours to use for personal expenses, like rent, utilities, car payments, and daycare.
On the other hand, a self-employed person does not receive a W-2. Instead, that person simply provides goods or services and receives money in exchange. It is up to the business owner to calculate and pay the correct amount of taxes to the state and federal government. However, unlike the employee, the business owner may pay many personal expenses from his business account, such as automobiles, phone bills, home office expenses, supplies, travel costs, by his own choosing, leaving little available to pay support.
How A Self-Employed Ex Can Manipulate Income
A self-employed ex may try to claim a lot of personal expenses as business deductions in order to artificially reduce the amount of money that he or she claims to earn. In other words, the self-employed person may try to skew business expenses to make it appear that he or she has far less money available for child support or alimony than what is really there. Consider a couple simple examples:
Example 1: The Excessive Traveler
John has owned a local plumbing business for 20 years and gets divorced. He usually earns about $100,000 in gross receipts (meaning total money earned). After deductions, expenses, taxes, and other costs of doing business, he usually nets (amount he gets to keep) around $50,000. This is the amount the court would consider when deciding his child support payments. However, during the year of the divorce, John shows that he has taken upwards of a dozen trips to several cities for “conferences” or “trade shows.” While these would normally be perfectly acceptable, the costs associated with travel have reduced his net earnings to less than $25,000.
Example 2: The Creative Contractor
Mike has a small construction business that normally earns about $500,000 each year. But after taxes, expenses, supplies, and other business deductions, he actually takes home about $100,000. During the year of his divorce and during the year immediately before, he showed large payments to a building supply store of nearly $200,000. He also showed large payments for tools totaling over $50,000. These expenses reduced his net earnings to less than $30,000 during each year.
How to Properly Assess Earnings
In both of our examples, the self-employed business owners had a reason for what they did. John might be visiting a girlfriend and simply “writing-off” the travel as business. Not only does this inaccurately reduce his income and thus child support payments, it is also tax evasion. Perhaps, however, John is truly racking up travel costs to avoid paying more child support. Even if these are legitimate business expenses, if they are far outside the usual, a skilled Orlando divorce attorney like Amy E Goodblatt or Tatiana Leo have the ability to review financial statements to determine whether these expenses are just a sham used to avoid paying support.
Mike, on the other hand, is possibly buying a ton of tools that he will keep in the package and return after child support is assessed. Some business owners cleverly begin buying business merchandise and goods during their divorces, in order to make themselves appear to have high expenses and less profits.
Since all business profits and losses must be reported, you should have your attorney carefully review these to determine if your ex is using his or her business to hide assets and profits. Reach out to Orlando attorney Amy E. Goodblatt if you need assistance today.