I am often asked how payment of Child Support and Spousal Support impact taxes. Simply stated, Child Support is not tax deductible to the person paying Child Support. Therefore, the person receiving the Child Support is not taxed on the money received for Child Support. The reason for this is that Child Support is not considered to be income.
Spousal Support is considered to be income for tax purposes. Therefore, the person paying Spousal Support receives a tax deduction for the amount paid as Spousal Support. Similarly, the person receiving Spousal Support is taxed on the amount of Spousal Support paid because the Spousal Support is considered to be income.
I am also asked about how an employer is supposed to withhold child support or spousal support from an employee paycheck. Before an employer deducts money from an employee’s paycheck for support, the employer must first determine the Employee’s “Disposable Income”.
How to Determine Disposable Income
There are two basic steps to determine how much to withhold for child support from an employee’s income: calculating disposable income and calculating allowable disposable income.
- Disposable Income = gross pay – mandatory deductions
- Disposable income is the amount of earnings remaining after subtracting mandatory deductions from an employee’s gross pay.
- Mandatory deductions include federal, state and local taxes, unemployment insurance, workers compensation insurance, state employee retirement deductions, and other deductions determined by state law.
- Note that disposable income is not necessarily the same as net pay. An employee may have a deduction taken from his pay that is not mandatory, such as union dues or a credit union car loan payment, or some other voluntary allotment.
- Allowable Disposable Income = disposable income x CCPA % limit
- Allowable disposable income is the maximum available for child support withholding. The ordered child support amount will usually be less than the allowable disposable amount and then the ordered amount maybe withheld in full. Even if the withholding order specifies a higher payment, the allowable disposable income is the most that may be withheld.
- The Federal Consumer Credit Protection Act (CCPA) sets limits on withholding from an employee-parent’s disposable income based on his/her current family situation and child support payment history. The CCPA protects the employee from having an excessive amount withheld. (Some states have enacted laws that provide even more protection to the employee-parent’s income, although most states follow the federal limits.)
- The withholding limits set by the federal CCPA are as follows:
- 50% Supports a second family, with no arrears or < 12 weeks in arrears
- 55% Supports a second family, and more than 12 weeks in arrears
- 60% Single, with no arrears or < 12 weeks in arrears
- 65% Single, and is more than 12 weeks in arrears.
Allowable Disposable Income Example
- Weekly gross pay is $760
- Weekly child support due is $295
- Mandatory deductions total $151
- Employee-parent is single and does not owe back child support
Note the following differences between net pay and disposable income in this example. The amount of disposable income, $609.00, is used to determine child support withholding limits, rather than the net pay, $469.
|Disposable Income||Net Pay|
|Gross Pay||$ 760.00||$ 760.00|
|Deductions||Less mandatory deductions only||Less deductions|
|Federal income tax||- 95.00||- 95.00|
|FICA||- 45.00||- 45.00|
|Medicare||- 11.00||- 11.00|
|Union dues||- 10.00|
|Savings bonds||- 25.00|
|Union pension||- 30.00|
|Credit union car loan||- 50.00|
|$ 609.00||$ 469.00|
- Step 1:
- Gross pay – mandatory deductions = disposable income:
$760 – $151 = $609.00
- Step 2:
- Disposable income x CCPA % limit = allowable disposable income:
$609 x 60% = $365.40
Note that 60% is the applicable CCPA limit because the employee-parent is not supporting a second family and does not owe any back child support.
Allowable disposable income is the maximum available for child support withholding.
Allowable disposable income (from Step 2 above) is 365.40.
- $365.40 > $295.00, so the full $295 is withheld for child support.
If you take the same example but increase the weekly child support payment to $400, you may not withhold the full amount due. By law, you may only withhold a maximum of $365.40. This means that the employee will fall behind by $34.60, and will be “in arrears.” Some states charge interest on the overdue amounts. The employee has the option of paying the underpaid amount directly to the issuing agency if he or she does not want to fall into arrears, or the employee may ask that the employer “voluntarily” withhold the unpaid amount.
If there is enough allowable disposable income, the employer should remit the full amount of current support due for each order. Sometimes an employee’s earnings do not stretch far enough to pay all of his or her orders. If there is not enough allowable disposable income, the allocation method of the employee’s principal place of employment (state of official duty station) must be followed to determine how much to pay for each order. States use one of two methods to allocate withheld payments among multiple withholding orders:
- Prorate by allocating a percentage to each order based on the total dollar amount of current support ordered; or
- Share equally by dividing the allowable disposable income by the total number of orders.
Multiple Income Withholding Orders – Same Employee and Different Children
If there is more than one withholding order, federal regulations require that some money must be paid to each order for current support. In addition, states have enacted laws specifying the method for allocating money toward current support due for each order. Thus, some money must be allocated toward all orders. The orders should not be paid on a “first come, first served” basis.
- Order A current support owed: $ 220/biweekly
Arrears owed: $ 50/biweekly
- Order B current support owed: $ 200/biweekly
- Order C current support owed: $ 180/biweekly
- Employee’s disposable income: $1000/biweekly
- Allowable disposable income: $550
Because employee is supporting more than one family and is in arrears, the CCPA limit is 55% x disposable income (55% x $1000 = $550)
- Total current support owed: $600/biweekly
- Total arrears owed: $ 50/biweekly
- There is not enough allowable disposable income ($550) to withhold the entire amount of current support due for all these orders ($600). Therefore, nothing may be withheld to satisfy the arrearage.
The issue of withholding Child Support and Spousal Support can be a tricky issue whether you are a party to a legal action or an employer tasked with the legal duty to withhold the proper amount of support. Please contact Attorney Keith F. Simpson today to discuss your legal issue at (310) 297-9090 or visit http://www.simpsonlaw.net to view more information.