When one or both spouses own a business, determining income for purposes of child support and spousal maintenance can be far more complex than simply looking at a W-2. Unlike salaried employees, business owners often have multiple income streams and unique financial flexibility, which can make identifying their true earning capacity more nuanced.
Here’s how we approach it when working with business owners in the divorce process:
1. Start with the Tax Returns—But Don’t Stop There
The starting point is often the personal tax return, which includes salary (W-2 income) and profit distributions (typically found on a Schedule K-1 for S-Corps or partnerships). These documents give us a snapshot of what has been reported to the IRS—but they don’t always tell the full story.
We also review business tax returns, financial statements, and bank records to better understand how and when funds flow from the business to the owner.
2. Look at Both Salary and Distributions
Business owners often set their own salary through payroll. In addition to salary, they may receive profit distributions based on their ownership percentage. For example, if someone owns 25% of a business and the company pays out $1 million in profits, they may receive a $250,000 distribution—even if their salary is only $150,000.
Both components—salary and distributions—should be considered in determining income for support.
3. Adjust for One-Time or Nonrecurring Events
Sometimes, distributions or income in a particular year are unusually high or low due to one-time events like a stock purchase, sale of a business asset, or other strategic financial moves. These events need to be carefully considered so that income used for support reflects a fair and sustainable level.
For instance, if a business owner purchased additional shares in the company, reducing their cash flow in that year, we may adjust income to reflect the impact of that investment.
4. Account for Business-Paid Personal Expenses
Another key consideration is whether the business is covering any of the owner’s personal expenses. It’s not uncommon for closely held businesses to pay for things like car leases, meals, travel, or even personal subscriptions. If so, those amounts should be added back to income for the purposes of calculating support.
Unfortunately, detailed information about these expenses isn’t always available—so we flag this as a possible income adjustment if further documentation emerges.
5. Evaluate Lifestyle and Spending Patterns
Even if financial records are murky, spending patterns can provide valuable insight. If a couple regularly paid off $25,000–$30,000 in monthly credit card bills without accumulating debt, that level of spending suggests a significant income stream. We cross-check this type of information with what is reported to see if the stated income is consistent with the lifestyle.
Bottom Line
Calculating a business owner’s income in divorce requires careful analysis, sound judgment, and access to the right financial records. Our goal is to create a fair and accurate picture of income that reflects not just what’s on paper—but what’s actually happening behind the scenes.
Need support as you navigate the financial complexities of divorce? At Purposeful Wealth Advisors, we help women make empowered, meaningful decisions about their money during and after divorce.
Reach out for a complimentary 30-minute consultation today to learn how we can support your journey to a stronger, more confident future.
