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Author Topic: Self Employment Reasonable Business Expenses  (Read 14846 times)

Guru

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Self Employment Reasonable Business Expenses
« on: January 30, 2014, 10:19:25 PM »
Anyone have examples of what are considered reasonable business expenses when determining child support?  I believe half of the social security and medicare taxes, which are typically paid by employers must be paid by a self employed individual.  Does anyone know if these are typically considered "reasonable business expenses" on line B.2 of the worksheet?  The word "reasonable" is not defined in the guidelines.
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KTM

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Re: Self Employment Reasonable Business Expenses
« Reply #1 on: January 31, 2014, 01:30:18 PM »
Guru,

Since Child Support is calculated on Gross income numbers and a reduction of the gross earnings by deduction for Social Security and Medicare is not given to everyone I do not believe there is any good argument for it to be allowed as a reduction to gross income for a self employed person.

Good Question.
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Guru

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Re: Self Employment Reasonable Business Expenses
« Reply #2 on: January 31, 2014, 02:47:08 PM »
KTM, if that is the case that means that a self employed person actually pays the same child support as an employed person but has less net income.  Lets say SS and medicare is about 15%.  Normally an employed person has 7.5% taken from their check, and the employer pays the other half.  But, for self employed they must make estimated tax payments and pay the entire 15%.  So they bring home 7.5% less.  I guess I'm just curious if that is considered a business expense.

Are there other business expenses which are common for child support.  Are all the writeoffs for taxes usually considered?
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KTM

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Re: Self Employment Reasonable Business Expenses
« Reply #3 on: January 31, 2014, 05:20:10 PM »
Well, than get the Child Support Committee to change the guidelines to reduce the Child Support gross income number by the documented amount of Social Security and Medicare, etc. for EVERYONE.

There is an explanation in the Child Support Guidelines that non taxable benefits are not considered to be part of the Child Support income number. I suppose a self employed person might argue that the amount in excess of what a non self employed person would pay, the employers portion, would be considered a non taxable benefit and thus a business expense. I still think that is a tough argument to make due to the technicality of the calculations required to determine the amount of $ difference between what a self employed person would pay over what a non self employed persons would pay.

Additionally, it would be difficult for the Court to determine whether this was an expense of your business which may be taxed separately as a business with you as an employee of that business or an independent contractor of that business or a "self employed" filer. Not my area of expertise. Definitely worth asking an accountant if the additional Child Support on 7.5% higher income would be a high enough $ value to justify all the extra paperwork and expense explaining it to the Court.
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Guru

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Re: Self Employment Reasonable Business Expenses
« Reply #4 on: January 31, 2014, 05:40:36 PM »
Why would it be difficult for the court to determine?  Wouldn't it all boil down to how you file your taxes?  You've mentioned in previous posts that if the guidelines were consistent with federal procedures, things would be easier. So I looked into federal tax law on the matter.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-and-Medicare-Taxes
This says that self-employment tax is the sum of the social security and medicare, but depends slightly on how much you make.

Then in this document: http://www.irs.gov/publications/p535/ch05.html it says the same thing.

To be clear, I'm not self employed and this doesn't pertain to me.  The question was brought up by one of our members and it seems to be a very good question and worthy of a new topic.  I'm not really looking for opinions as much as I am examples of what other attorneys and judges have traditionally considered business expenses.
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KTM

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Re: Self Employment Reasonable Business Expenses
« Reply #5 on: February 01, 2014, 10:49:29 AM »
It appears that your assumption is that people will file their tax returns under the same filing status every year and that tax filing status would give the Courts the information they need to determine appropriate deductions for a self employed person. Is that true?

Child support is based upon pre tax income. So, it would be odd that the amount of additional taxes a self employed person pays would reduce the Child Support income number unless it is deductible on your tax return as a business expense. IRS Pub 535 as you attached below pertains to business owners deducting expenses they pay for their employees and does not list taxes as a education nor does it appear to apply to a self employed person.

I suggest getting helpful information here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

http://www.irs.gov/pub/irs-pdf/p334.pdf (Chapter 8 - Business expenses)
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Guru

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Re: Self Employment Reasonable Business Expenses
« Reply #6 on: February 01, 2014, 12:49:52 PM »
I'm not sure filing status pertains to this discussion, as my only question is about business expenses, not the amount of tax owed.  You are correct that child support is based on gross income, but the numbers are reduced to account for income taxes.  Self-employed individuals pay more taxes, period.  I'm simply saying that 1/2 of the self-employment tax should probably be considered a standard business expense for purposes of child support.  Basing a self-employed person's child support on the same gross income as an employed person seems as if it would not be fair to the self-employed person because they don't bring home as much.

So, as I read through publication 334 as you've kindly referenced, I find the business expenses listed in chapter 8.  On page 36 it does state that 1/2 of the self-employment tax is deductible as a business expense.  I would find it prudent to consider any expenses in chapter 8 as a "reasonable business expense."

Quote from: KTM on February 01, 2014, 10:49:29 AM
So, it would be odd that the amount of additional taxes a self employed person pays would reduce the Child Support income number unless it is deductible on your tax return as a business expense.

So are we in agreement on this point?
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KTM

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Re: Self Employment Reasonable Business Expenses
« Reply #7 on: February 01, 2014, 04:59:20 PM »
It would appear that if a petitioner can demonstrate to the Court a history of filing a schedule C document with the IRS and meet the requirements in chapter 1 of IRS Pub 334 defining "self employment" (you are the business) and as such are not a qualified "paid employee" of the business as owned by more than one individual, is unincorporated and is not an L.L.C. (is a sole proprietor or independent contractor) than the gross income of the business would be considered as the petitioners income and the application of "business expense" deductions in section 8 of the IRS publication 334 would apply to the calculation of income for the purpose of calculating Child Support in Kansas.

See IRS pub 15-A to determine whether or not the IRS would consider an individual to be an employee or an independent contractor.
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