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Self-Employed Income

Determining true income for business owners, S corp shareholders, and independent contractors.

Self-Employed Income

How is income determined for a self-employed spouse in divorce?

A self-employed spouse's income for divorce purposes is rarely the number on their tax return. True income includes salary, K-1 distributions, shareholder distributions, retained earnings, and personal expenses paid through the business. A financial analyst normalizes the income by adding back non-recurring expenses, personal expenses, and excess compensation, then compares the business's cash flow to the lifestyle the couple actually lived. The goal is to find the income available for support, not just the taxable income reported to the IRS.

Self-Employed Income

How are business-paid personal expenses treated in divorce?

Business-paid personal expenses are treated as additional income to the business owner in a divorce. When a business pays for the owner's personal auto, travel, meals, insurance, or family-member salaries, those costs are not true business expenses - they are compensation in disguise. A financial analyst identifies these expenses in the general ledger and adds them back to the owner's income for support purposes. This normalization can significantly increase the income available for alimony and child support, sometimes doubling the reported figure.

Self-Employed Income

How is S corporation income analyzed for alimony?

S corporation income for alimony is analyzed by looking beyond the salary on the W-2 to include K-1 distributions, retained earnings, and personal expenses paid by the business. An S corp owner can set their own salary - often artificially low - and take the rest as distributions, which are not subject to payroll tax. A financial analyst normalizes the income by adding back personal expenses, nonrecurring costs, and excess compensation, then compares the total to the lifestyle the couple lived. The goal is to find the actual cash available for support.

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