There are many workforce groups whose income is heavily reliant on the amounts of commissions and bonuses they receive. No other group in the workplace community seems more vulnerable than real estate agents and brokers to the ups and downs of commission income.
Although married agents and brokers can create a family budget that responds to the variations in monthly income caused by commissions, when agents and brokers go through divorce, and the court has to assign a child and/or spousal support amount to be paid, that fluctuating income can become a big problem.
For salaried employees, all of the states have a guideline calculation that creates a proposed child and/or spousal support amount based on a percentage of the parties’ combined income.
Those guidelines take either gross or net salary from both parents for the prior year, uses the amount of time each of the parties spend with the child or children, and the application of the formula creates a child support and/or spousal support figure to be paid by the higher-earning spouse.
This turns out to be relatively fair, because salaried employees tend to make about the same amount of money each year, in the same monthly amounts.
However, when one spouse’s income is highly reliant on commission or bonus income, using the prior year’s total income figure could result in a going-forward support amount that is either too high or too low. At the very least, the monthly guideline support figure could be hard to pay in most months, and easy to pay only in months where commissions or bonuses are earned.
For example, assume that a real estate agent or broker earned $300,000 in the prior year, but that total amount was actually paid in only three separate commission payments of $150,000 in February, $100,000 in June, and $50,000 in September.
Then, basing the going-forward guideline support figure on $300,000 for one child who is in each parent’s custody for 50 percent of the time could result in monthly payments (using California’s Guidelines for this calculation, and assuming the other spouse has no income) of $2,000 per month in child support and another $4,800 per month in spousal support.
Those payments might be “easy” to make in months when commissions were earned this year, but in all other months, the payments might be impossible to make.
So, if the court is going to use bonus or fluctuating income in addition to any salary income (if any) for its calculation of support, what is the best way to ensure that a party who receives bonuses or commissions doesn’t overpay?
Most states have percentages that are applied to bonus or commission income when such income is actually received
The answer to fluctuating income of a parent who pays support is the use of a percentage to be paid from any and all commissions or bonuses at the time that those amounts are actually received.
Most states provide that in cases where a parent earns a significant portion of their income from bonuses or commissions, the court will set guideline support on whatever portion of their income is regular and recurring, and then add on a percentage of any bonuses or commissions earned.
California was one of the first states to apply such a bonus or commission percentage to child and spousal support, and most states have now followed suit. The specific case that led the way in applying guideline child and spousal support calculations to people who earned bonuses and commissions was Marriage of Ostler & Smith (1990) 223 Cal.App.3d 33.
In Ostler & Smith, the parties had a long-term marriage of 21 years. They had four children, but only two were minors. The wife had always been a stay-at-home mom, whereas the father received a master’s degree. He became a successful auditor and started receiving large bonuses.
The parties were able to resolve the property issues in mediation, but they could not agree to the support figures. The wife wanted the support to be based on the prior year’s total income (including bonuses), whereas the husband argued that his bonuses were not guaranteed and should not be “counted.” The trial court took a “middle” position:
“No future bonus is guaranteed. It would therefore not be appropriate to base a support order on Husband’s bonus income and then require him to file motions to modify at such times as the bonus is reduced. It would be far more fair to all parties to base the support order on Husband’s income from salary . . . and to allocate a portion of the future bonus income to the children and to Wife by way of a percentage interest so that future litigation will not be necessary as the bonus income changes.” Id. at 41-42.
The judge decided to charge 10 percent of the bonus for each minor child, and 15 percent of the bonus for the wife as spousal support, for a total of 35 percent of the gross bonus income. This way, the parties would not need to return to the court any time a bonus was granted. The new approach was upheld on the subsequent appeal.
Things to remember if you have fluctuating income
No matter what state you are in, if you are getting divorced and you have fluctuating income due to bonuses or commissions, you need to, at the very least, consult with a qualified family law attorney to find out the correct way to treat that additional income. Additionally:
- Whether you are mediating your divorce, or you end up in court, you need to make sure that everyone knows that your income is highly dependent on bonuses or commissions. In fact, the first thing that you should explain — to your soon-to-be-ex-spouse, your attorney, the mediator or the judge — is how much of your income comes from these fluctuating sources, and how “irregular” those payments are.
- The child support calculator programs used for support typically have built-in tables that provide suggestions for the percentages both for child and spousal support. Make sure you know those tables and what they suggest before you go into court.
- Collect several years of income figures, separating regular income from fluctuating income, so you are ready to present your own data on how your income cannot be accurately predicted from year to year.
- Always create an income “floor” to avoid a “double dip” on your regular income.
- If the bonuses or commissions only begin to be received after the parties’ separation, you should make sure that the bonuses are not counted for spousal support, because spousal support is supposed to be based on earnings during the marriage.
- Likewise, you may want to argue for a “cap” on how much bonus income will be applied to spousal support because spousal support is not intended to exceed the marital standard of living from during the marriage.
- Always consider submitting a declaration from your employer describing how bonus and commission income is decided — providing effective corroboration of your story from a neutral source.
- In the rare instance where you are nearly certain that your bonus or commission income will be higher in coming years, you may want to, instead, avoid a percentage calculation on additional income, and instead base your support on the prior, but ultimately lower, year’s income. However, if it turns out that your next year’s additional income is less than the year used, this will hurt you.
Whatever route you take, whether it is mediation or litigation, just remember to be upfront and honest in your reporting of your income. Most states place a duty on all parties to provide full and fair disclosure of their respective income figures. Parties who are found to have under-reported their income are dealt with harshly, usually with sanctions.
Above all, realize that for most people, divorce is a second chance at happiness. If you are the higher-earning-spouse, there is no way to avoid paying support. But your career, and your ultimate income levels, remain solely in your control. Pay the support that is ordered, and keep your focus on your own future and the increased income you can earn, as well as the increased happiness you can create in your new, post-divorce life.
David J. Glass is a partner with Enenstein, Pham & Glass Law in Los Angeles, California. Connect with him via LinkedIn.
