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Michigan Divorce for the Self-Employed
Divorce may become more complicated when one or both spouses are self-employed. Michigan divorce laws apply the same whether you have a regular job or run a business. Self-employment brings unique challenges when determining income, dividing property, and deciding support payments. If you or your spouse is self-employed and divorcing, knowing what to expect can help you plan and make informed decisions.
Understanding Marital vs. Separate Property
Michigan is an equitable distribution state, which means the court divides marital property fairly but not always equally. The first step in that process is determining which assets are considered marital and which are separate.
If a business was started or significantly grown during the marriage, it’s usually considered marital property, even if only one spouse ran it. A business owned before the marriage might be regarded as separate, but any appreciation in value during the marriage could be subject to division.
For example, if you opened a graphic design firm five years before getting married but expanded it significantly while married, hiring staff, increasing revenue, or buying new equipment, the increased value might be part of the marital estate. Even if your spouse wasn’t involved in the business, they may be entitled to a share of that growth.
Valuing the Business
Figuring out what a business is worth can be one of the toughest parts of a divorce when one or both spouses are self-employed. Unlike a savings account or retirement fund, which has a specific number attached to it, a business doesn’t always have a clear value. This is particularly true when the business’s success depends heavily on the owner’s personal time, skills, and relationships.
The court usually hires a financial professional, such as a forensic accountant or a business appraiser, to get a fair estimate. These experts examine a wide range of information, including cash flow, assets, liabilities, and comparisons to similar businesses in the same industry. They might also review tax returns, income statements, balance sheets, and client contracts to build a complete picture of the value of the business.
Prepare early if you’re self-employed and going through a divorce. Keep detailed records, stay organized, and be honest about your finances. Trying to downplay the value of your business or hide income can work against you and may damage your credibility in court.
Determining Income for Support
Income is easy to calculate for someone with a regular job. Employers issue W-2s and pay stubs that show precisely what the person earns. It can be more difficult to determine the income of self-employed individuals. Many business owners write off expenses, reinvest profits back into the business, or pay themselves in a non-traditional way.
In Michigan divorce cases, the court determines each spouse’s actual income when deciding on support. This can include actual business profits, perks that are personal benefits, like using a company car or taking business-paid vacations, and even cash income or earnings that weren’t reported correctly.
If the court believes someone is reporting less income than they really earn or is choosing to earn less than they’re capable of, it may assign an income level based on what that person has earned in the past, how they live, or what they could reasonably be making. This happens even if that amount isn’t on their current tax return.
Child and Spousal Support
Once the court has determined both parties’ incomes, it uses a formula to determine child support. The calculation considers parents’ incomes, the number of children, and how parenting time will be divided.
Spousal support isn’t determined by a formula like child support. Judges weigh several factors, including the length of the marriage, each spouse’s ability to earn a living, and the lifestyle the couple maintained during the marriage. The court also considers what each person contributed to the home or business, as well as their age and health.
For self-employed people, documentation is important. If your income changes monthly or varies by season, the court might look at your income over the past few years and either average it or use your highest-earning periods to guide the decision.
Hidden Income and the Discovery Process
Self-employed people often have more control over how their income is reported, which can lead to more questions during a divorce. If one spouse kept most of the financial information to themselves or ran the business alone, the other spouse might worry that income is being hidden or records are being manipulated.
During divorce, both sides go through a process called discovery to gather financial information. This includes requesting documents, asking questions under oath, and bringing in experts if needed. Bank statements, receipts, and even social media can be used to uncover hidden income or assets.
If you’re self-employed, be honest and transparent. Hiding money or giving misleading information can hurt your case and lead to serious consequences, especially regarding custody or dividing property.
Tax Issues in Divorce
Support payments come with tax implications. Child support is not tax-deductible for the person paying it, and the person receiving it doesn’t have to count it as income. Spousal support, however, depends on when your divorce agreement was finalized. For divorces completed after 2018, the payer can no longer deduct alimony, and the recipient no longer has to report it as income due to 2019 legislation.
Protect Your Rights, Your Kids, and Your Future
Divorce is never easy. Whether you’re dealing with child custody, dividing property, or navigating the complexities of a self-owned business, you don’t have to do it alone. Bailey & Terranova, P.C. helps people take control of their future with clear legal guidance and strong representation. We listen, strategize, and fight for what matters most to you. Contact us at 517.236.7187 to request a consultation.
