Facts: Mother and Father, the parents of two children, divorced after 19 years of marriage. Wife was mostly a homemaker and stay-at-home parent while Husband was the primary wage earner. To help with the children’s care, the parties employed several nannies for about $5000 per month. Both admitted to living an extravagant lifestyle and spending more than their income.

Although Mother was employed at various jobs during the marriage, at the time of divorce she had not worked outside the home for five years.

Husband’s income and expense statement showed his self-employment income was $31,250 per month after deducting the self-employment tax, but his monthly expenses were $36,529, resulting in a monthly shortfall of $5279.

Wife’s income and expense statement showed zero income and monthly expenses of $16,266 for herself and the children.

When calculating child support, the trial court found Husband earned $39,661 per month while Wife earned zero. This income amount was based on Husband’s 2022 IRS Form 1099, which the trial court found to be his latest proof of income. The Court set Husband’s child support obligation at $3200 per month.

In its analysis of alimony, the trial court found Husband earned $31,250 per month, which came from Husband’s income and expense statement. The Court found Wife had recently applied for over 10 jobs, one of which paid an annual salary of $80,000.

The trial court awarded Wife alimony in futuro of $9500 per month for a little over a year, reasoning this would allow Wife “ample time and opportunity to reenter the workforce and make a salary commensurate with what she was earning when she left the workforce in 2018.” After a little over a year, the alimony would be reduced to $6000 per month to account for Wife’s expected income from employment.

Husband appealed.

On Appeal: The Court of Appeals vacated the trial court’s judgment.

When calculating a parent’s gross income for child support, Tennessee courts must consider all income from any source. For self-employed parents, Tennessee courts must reduce the parent’s income only by the reasonable expenses required to produce the income. Specifically, income from self-employment includes income “less reasonable expenses necessary to produce such income.”

Tennessee courts recognize the potential for a self-employed parent to manipulate income to avoid payment of child support by either failing to aggressively solicit business or by inflating their expenses, thus reducing their income.

Self-employment taxes. Husband argued the trial court did not consider the amount of self-employment tax he paid when calculating his income for child support.

The Child Support Guidelines state that any self-employment tax paid up to one-half of the maximum amounts due in the year shall be deducted from gross income when calculating child support. The Court found clear error:

The Guidelines clearly provide that self-employment tax paid by a parent “shall be deducted from that parent’s gross income.” Here, the trial court utilized the 1099 Form as the measure of Husband’s income for child support purposes. The 1099 Form, however, did not include information concerning the amounts Husband paid in self-employment tax. Instead, the 1099 Form merely listed Husband’s annual compensation amounts, which the trial court divided by 12 to calculate his monthly gross income….

Husband was specifically questioned regarding self-employment tax, and he testified as to the amount of self-employment tax that he had paid as shown on those tax returns. Although the trial court deemed Husband’s 2021 income tax returns to be an appropriate measure of Husband’s income when calculating Husband’s alimony obligation, the court chose to use the income amount from the 1099 Form from 2022 when calculating child support. We agree with Husband that it is the typical practice of trial courts to utilize the same income figures for a party when making both alimony and child support determinations. We also recognize that it is within the trial court’s discretion to utilize a range of acceptable sources for a party’s income amount for purposes of calculating child support….

However, regardless of the source utilized, the Guidelines direct that self-employment taxes shall be deducted from the gross income of eight self-employed parent. Husband demonstrated that he had paid self-employment tax as reflected on his income tax returns for 2019 through 2021. Accordingly, the trial court erred when it failed to deduct the amount of self-employment tax paid by Husband from his gross income on the child support worksheet in accordance with the Guidelines.

The Court reversed the trial court’s child support award and remanded it for recalculation. Upon remand, the trial court was instructed to determine the proper amount of self-employment tax to be deducted from Husband’s gross income.

Husband also faulted the trial court for failing to deduct his reasonable business expenses from his gross income when calculating child support.

The Guidelines require Tennessee courts to calculate a self-employed parent’s income “less ordinary and reasonable expenses necessary to produce such income.” When a business expense is challenged, the obligor has the burden of showing that the challenged deduction was a reasonable expense necessary to produce their income.

The Court found error:

The trial court chose to calculate child support based on a gross income figure shown on the 1099 Form but did not consider whether Husband had paid business expenses from that amount, despite Husband’s lengthy testimony concerning the payment of such expenses in previous years. Furthermore, we note that Wife did not question or challenge any of Husband’s claimed business expenses for the years 2019 through 2021.

The Court remanded the issue to the trial court with instructions to determine the amount of reasonable business expenses that should be deducted from Husband’s income when determining child support.

Similarly, the Court found the trial court erred by failing to include the cost of the children’s health insurance premiums, whether one child’s medication expense is recurring, the amount of work-related childcare expenses, and by failing to determine whether Wife is willfully underemployed after “abundant testimony on the matter,” including Wife’s admission that she was unemployed by her own choice.

The Court vacated the trial court’s judgment and remanded the case for further proceedings. The alimony award was also vacated because it must be determined after determining the correct amount of child support.

K.O.’s Comment: When calculating child support, the Court found the trial court erred on the issues of Father’s income, Mother’s income, the children’s portion of the health insurance premium, recurring medical expenses, and work-related childcare expenses. Apparently, the calculation of parenting time was correct, so there’s that.

Source: Holliday v. Holliday (Tennessee Court of Appeals, Eastern Section, October 31, 2024).

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