The highest paid executive earned more than $101 million in 2011 according to Forbes Magazine but his salary was only around $1 million. If this executive was ordered to pay child support in Texas, he would not be able to avoid child support on his entire income just because his salary is only $1 million.
The laws relating to calculating child support in Texas account for the many ways executives are compensated. Note – Texas has child support caps relating to net resources that would be an issue in this example but are not discussed herein. For more information, please refer to the blog titled Child Support Caps for the Wealthy.
Current child support is typically a fraction of the obligor’s net resources less certain deductions. Most people assume child support will be based upon their net monthly paycheck but this is an over generalized belief and in the case of the American executive, it misses the point.
The point is, child support is based on the obligor’s overall financial standing. The term “net resources” includes employment income but is not defined by it. Examples of more non-traditional net resources include trust distributions, stock options, self-employment income, rental income, commissions, bonuses, severance pay, retirement pay, social security pay and even unemployment and disability pay. Examples of items not considered net resources are return of capital or principal, accounts receivable, welfare benefits, foster-care payments and your spouse’s income.
In cases where the obligor has good years and bad, as in the case of the real estate mogul, the court will most likely average multiple years to determine his or her net resources. The averaging process is based upon what the obligor could pay not necessarily what he or she is able to pay.
Allowable deductions to net resources are federal income taxes, social security taxes, union dues, the child’s health insurance and cash medical support. Note, you cannot deduct 401k contributions from the net resources figure. Calculating the deductions can be fairly simple if your net resources are comprised of employment compensation only. The calculation is more complicated when net resources also include rental income, trust distributions or the other more non-traditional forms of resources.
In any case, child support is essentially based on your financial status as a whole. Being underemployed or paid in cash only also doesn’t help you avoid child support. For more information on calculating child support, check out my other blog entries on child support.