Tag Archive for: earning capacity

Earning Capacity

In a support matter, the incomes of the parties will be used to calculate an appropriate award based on the support guidelines applicable throughout the Commonwealth. At the initial appearance for a support matter, both parties are asked to bring in proof of their income in the form of W-2s, tax returns, pay stubs, or other documentation of income received. If a party is unemployed or underemployed, the rules specify that an earning capacity may be imputed. Pennsylvania Rule of Civil Procedure 1910.16-2(d)(4) explains the first step is a finding that a party willfully failed to obtain or maintain appropriate employment. Involuntary reductions in income (e.g. lay-offs or unemployment due to illness or disability) generally do not trigger earning capacity arguments.

If the reduction in income is seen as voluntary or willful (e.g. took a lower paying job or cut hours) then the court may impute an income consistent with that party’s earning capacity. Factors to consider when trying to identify an appropriate earning capacity include age, level of education, special training/skill set, work experience and prior earnings history. A Judge must explain the rationale behind any earning capacity that is assessed against a party. The earning capacity provision exists so that parties who have a support obligation cannot escape their obligation by purposely leaving their jobs or otherwise lowering their income. Under- or un-employed parties seeking to avoid imputation of an earning capacity should be prepared to show they have taken good faith efforts to secure comparable employment and that any reduction in income was for a valid purpose.

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Earning Capacity

In a support matter, the incomes of the parties will be used to calculate an appropriate award based on the support guidelines applicable throughout the Commonwealth. At the initial appearance for a support matter, both parties are asked to bring in proof of their income in the form of W-2s, tax returns, pay stubs, or other documentation of income received. If a party is unemployed or underemployed, the courts may consider their earning capacity. Pennsylvania Rule of Civil Procedure 1910.16-2(d)(4) discusses earning capacity. First, the rule indicates there should be a determination that a party willfully failed to obtain or maintain appropriate employment. Involuntary reductions income (e.g. lay-offs or unemployment due to illness or disability) generally do not trigger an earning capacity analysis.

If the reduction income is seen as voluntary (e.g. willingly took a lower paying job or cut hours) then the court may impute an income consistent with that party’s earning capacity. A number of factors should be considered when trying to identify an appropriate earning capacity. For example, age, education, training, skill set, work experience and prior earnings history are relevant to consider. A Judge must explain the rationale behind any earning capacity that is assessed against a party. The earning capacity provision exists so that parties who have a support obligation can’t escape their obligation by leaving their jobs or otherwise lowering their income. Under- or un-employed parties seeking to avoid imputation of an earning capacity should be prepared to show they have taken good faith efforts to secure comparable employment and that any reduction income was for a valid purpose, not to lower or avoid a support obligation.

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Earning Capacity in a Divorce or Support Action

If you are getting a divorce and there are child or spousal support issues involved in your case, the Court can hold you to an earning capacity if you are not working or you are not fully employed. What this means is that Court can assess you with a potential income based on your work history, education, skills, or even possible earnings. For example, if you work 15 hours a week and earn $ 20 an hour, there is a good chance the Court can impute earnings of 40 hours a week at $ 20 and hour on you when they determine support. This does not mean you have to work 40 hours but it means that income will be used to determine how much support you will receive from the father of your spouse.

Sometimes a vocational expert may be hired to assess your abilities to earn a living and this person will testify and write a report on what they think is a reasonable earning capacity. This is not always employed due to the cost of hiring a vocational expert and bringing them to Court but may be useful when an employee has significant education or skills that should generate a higher income.

If you are self-employed, the Court may also impute an income to you that differs from what you report on your tax return. The Court will scrutinize you more closely when you are self-employed, reviewing tax returns, personal expenses paid by the business, your income and expenses form. If you attempt to testify that your income is less than what your expenses clearly seem to generate, the Court may decide your income is based on the expenses you pay out.

If you are disabled or you are receiving unemployment, the Court will use the disability or unemployment income as your income rather than assess you will a full time earning capacity. In some instances, a court may attempt to hold you to the minimal income you can earn while still collecting benefits, but you should never agree to this. If you are disabled and have children, you may want to also be sure you have applied for the benefit for the child. If you are disabled but you have not yet gotten approved for Social Security, the Court may hold you to an earning capacity. In those cases, you want to get a disability note and records certified from your doctor.

For additional information, see:com/Family-Law-Divorce/Divorce-Involving-Business-Owners-the-Self-Employed/

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Self-Employed Parties and Support

It is important to take a very close look at the finances of a self-employed party in a support case. Generally, actual earnings will be utilized to accurately measure the income available for support and ability to pay. However, in a few circumstances, including at times the case of a self-employed party, earning capacity may be used instead to effectuate economic justice. For example, a self-employed party may reduce the salary they pay themselves in order to try to reduce the support obligation. Additionally, many self-employed parties claim a lot of deductions on their tax returns before reporting their net income. A portion of these deductions may be added back when the court is trying to determine a more accurate figure for income.

Specifically, the courts may consider all the personal perks provided at the expense of the company such as cell phone, car payments, entertainment, meal, or travel expenses, country club dues, and other comparable expenses that primarily benefit the individual. These expenses may be still be permissible deductions for tax purposes but the court should consider the amount and nature of these expenses in a support case. In Commonwealth v. Gutzeit, the Defendant owned his own business and claimed entertaining, maintenance and repairs of automobiles, life insurance for himself, and even gas for his Wife’s car as business expenses (180 A.2d 324 at 327). The court acknowledged that while the total sum of these deductions should not necessarily be added back in at least a part of them should be as determined from all the circumstances of the specific case to arrive at a reasonable earning capacity.

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