Parents are required by law to provide financial support for their children, even after they divorce. State laws establish guidelines for parents to pay this support, and divorce courts issue orders setting child support payment amounts based on these guidelines. Generally, states consider many types of income, including self-employment income, when establishing child support amounts.
Though state laws vary, courts generally begin their child support calculations with a determination of each parent's gross income. Gross income generally means income from all sources, including wages, rental income, interest income and self-employment earnings. In states like Tennessee, self-employment income is defined as income from business, work as an independent contractor, sales of goods or services, or other types of self-generated income.
Expenses Can Be Deducted
Since a business' gross income rarely reflects the business' profit, states generally allow a self-employed parent to deduct his business expenses from the business' gross income before including it in his personal gross income for child support purposes. For example, a parent who sells auto parts could have a business that earned $120,000, but had $90,000 in expenses to buy parts, pay employees and rent building space, so that parent would have a gross personal income of $30,000. Courts typically consider this after-expense amount when looking at each parent's income for child support purposes.
Treatment of Deductions
Though self-employed parents are allowed to deduct business expenses from their incomes, deductions for child support purposes are not necessarily the same as those for tax purposes. For example, New York guidelines allow judges to consider business equipment depreciation differently when addressing child support than the Internal Revenue Service might consider depreciation when that parent pays his federal income taxes. Tennessee generally does not allow any depreciation deductions from self-employment income. Since expense and deduction rules are set by each state -- and sometimes by each court -- it is important to know your local rules to accurately calculate child support amounts.
States Have Enforcement Options
After the court sets the amount of child support, a self-employed parent must pay that amount like any other parent. However, since the self-employed parent does not have a paycheck from which these payments can be withheld, it can be difficult for a state's enforcement agency to collect payments if a self-employed parent refuses to pay. Depending on your state's laws, child support enforcement agencies can place liens on payments to the business from its customers, collect money directly from the business' bank account or take the owner's occupational licenses away for back child support. These types of enforcement actions are designed to encourage the self-employed parent to pay his child support even though there is no employer to seize his wages.