How Does Self-Employment Income Affect Minnesota Child Support?

In Minnesota, ​child support is calculated according to guidelines set forth by the state legislature. Of course, calculations are only as good as the information on which they are based, which includes the parents' gross income. When a parent gets a regular paycheck with a pay stub clearly indicating gross pay, identifying gross income is relatively easy. But what happens when a parent is self-employed?

Minnesota Statutes 518A.30 states that for purposes of calculating child support, "income from self-employment or operation of a business, including joint ownership of a partnership or closely held corporation, is defined as gross receipts minus costs of goods sold minus ordinary and necessary expenses required for self-employment or business operation."

The statute goes on to say that amounts the Internal Revenue Service allows for the accelerated component of depreciation expenses and investment tax credits are specifically excluded from "ordinary and necessary expenses," as are business expenses the court determines to be inappropriate or excessive. If a self-employed person seeks to deduct an expense from gross income, he or she bears the burden of proving that the expense really is "ordinary and necessary" if the other party challenges it. 

Proving "Ordinary and Necessary" Expenses

When one parent is self-employed in a situation in which child support needs to be calculated, both parents tend to be on guard. The self-employed parent is likely concerned that his or her legitimate business expenses will be discounted by the court, and actual income available for child support overestimated. The other parent may suspect the self-employed parent of "padding" business expenses to make his or her income look lower than it really is.

Since the burden of proof of the legitimacy of business expenses rests on self-employed parents, let's take a look at what they can do in order to bolster their position in court and reassure the other parent that they're not trying to cheat on child support.

Good record-keeping is essential. If you are a small business owner, it's worth hiring an accountant or bookkeeper to manage your books. (That would, itself, most likely be considered an ordinary and necessary expense!) Separate business expenses from personal expenses. Otherwise, there is a risk that legitimate business expenses will be excluded by the court. Keep and organize receipts for even the smallest expenditures on behalf of the business. If you make purchases for the business using a credit card, it's wise to have a separate credit card that is used exclusively for the business, and to avoid making business purchases on your personal credit card.

If you remarry, and your new spouse is employed in your small business, tread carefully. Resist the temptation to pay him or her an inflated salary in order to reduce your own gross income. Research salaries for similar positions and pay your spouse in line with those guidelines.  

Remember above all that it's easier and more cost-effective to plan wisely than to go back and fix mistakes, or to pay more in child support month after month than you should really owe. As soon as you realize you will be paying or receiving child support, make arrangements to get your books in order, and speak to a qualified ​family law attorney early on in the process to accurately calculate child support.  Please contact us at Mundahl Law with any questions you have about how your self-employment income will impact your Minnesota child support calculations. We look forward to working with you.

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