"Bonus" Income and
Ostler & Smith Awards: Best Practices For How to Ensure Fair Child and Spousal Support Awards
It is not uncommon for parties to divorce or custody proceedings to be
faced with the question of how to account for fluctuating income or commissions
and bonuses when determining proper spousal and child support awards.
Receipt of true "bonus" income is discretionary and is rarely
guaranteed until it is actually paid to an employee (especially when it
is based upon year-end profitability). As a supported spouse or unmarried
parent, how can you ensure you are paid a "just" share of these
earnings as additional support? As a support obligor, how do you avoid
overpaying additional support and assure that the portions that represent
alimony are tax deductible?
The problem arises because go-forward support obligations are usually derived
by looking at the parties' past earnings history, typically by taking
a snapshot of the prior calendar year's income (or the preceding twelve
months), as the most reliable measure of future income streams. Judges
may "gross up" a party's employment receipts, add in year-end
bonuses, and then divide that amount by twelve and enter the information
into the Xspouse or Dissomaster and punch the "enter" key. This
treats the payor's monthly support obligation as though these future
earnings have already been received in the coming year, because that is
what happened in the prior. But if it doesn't, or the bonus decreases,
this can create a severe financial hardship in terms of a supporting spouse's
ability to pay their own living expenses - not to mention a windfall to
other party. As it is, many of us effectively spend the first 107 days
of each year to generate the earnings we need to pay just our annual tax
bite (assuming an average 29% federal, state and local effective tax rate).
If a spousal or child support award, and especially a support order that
combines both, is based upon average monthly salaries (or commissions)
PLUS end of the year bonuses that may or may not come at year-end, then
a support payor may effectively have to work a half a year or more before
they begin to accumulate the money needed to pay their basic costs of
living. Until the bonus arrives the only way for such support obligors
to survive economically is to borrow from credit cards or family members.
If it never arrives they may have no opportunity to catch up. Judges are
rarely willing to maintain any kind of retroactive jurisdiction to recalculate
monies due under past support orders (i.e., to 'wait and see'
and then give credits back if the bonus fails to materialize or is less
than anticipated). Hence, if the expectations at the outset are later
proven wrong, great hardship and material injustice can occur that as
a practical matter won't get undone or remedied.
Paying Bonus Income Doesn't Allow a Support Obligor to Catch-Up
Small wonder that many support obligors feel antagonism and resentment
towards the other party who seeks support based upon those cumulative
income numbers - they view the potential bonus as their only hope for
catching up with their own tax and personal expenses. It is therefore
imperative that both parties, not to mention family court judges who have
wide discretion over such matters, have a clear understanding and willingness
to adopt or impose a predictable and fair mechanism for calculating "cash
available for support" when an element of income fluctuates. Unfortunately,
in my experience, some supported spouses resist a balanced approach that
considers that the working parties (or higher earners) are themselves
entitled to a life, inexperienced family law attorneys fail to comprehend
some of the nuances concerning bonus income orders when they negotiate
settlements or argue a client's position in court, and relatively
inexperienced family law judges don't always think through the burdens
that unbalanced support orders can create for payor spouses and registered
domestic partners - and especially the tax ramifications and consequences.
This issue came to my attention again recently in a case I'd substituted
into as the husband's third attorney. In the three years prior to
separation, he earned between $185,000 and $225,000 each year as commissions
that varied widely from year to year. The parties had two minor children,
and the mother had not yet returned to the work-force. Husband worked
in a commission based service business as a sale's representative.
He signed clients up for his employer, and the employer asserted certain
reimbursement claims on behalf of his 'customers' that could take
up to a year to finally resolve. Husband's employer was entitled to
a percentage of these reimbursements as his fee, and my client a percentage
of that. My client did not receive his commissions until the claims on
behalf of these customers were each paid, so that during any given month
some claims were being finalized and paid out, and new business was being
generated that would close at a later date. Because of this there was
no way to know the total commissions that the husband had earned throughout
the year until the books were closed on December 31st. Based upon prior
years, however, certain assumptions could be made that permitted the employer
to pay Husband a base salary of $10,000/month ($120,000) yearly, with
the balance of what he was owed ("overages") at the end of the
year becoming fixed at that time and paid over in January. Really these
were not true "bonuses" - they were simply the excess commissions
over the base salary that could not be distributed until the accounting
period closed, since the $10,000 was set to ensure him a minimum dependable
earnings' stream so that the family could budget from month to month.
Husband's first attorney argued at the wife's hearing on her request
for temporary alimony and child support that husband's income should
be inputted into the Xspouse at $10,000 month and that he should be ordered
to pay 50% of whatever husband received in January each year for the year
prior to equalize the wife/mother's share of husband's earnings.
As discussed below, this was the first mistake and it reflected a complete
ignorance about how percentage based support orders are customarily treated
- he should never have conceded that the support obligations (spousal
and child combined) ought include 50% of these commission overages, but
instead he should have urged a lesser share. Second, husband's prior
attorney failed to give any consideration to asking the court to allocate
a portion of the January commissions to spousal support as opposed to
child support, because the spousal support component would be tax deductible
while the child support component would not be. When the Court made its
orders no consideration was given to the tax implications of such a percentage
support order; nor did the attorney ask the Court to reserve jurisdiction
on that question so that it could be cleaned up later. As a result, husband
was ordered to pay 50% of his gross January "bonus" to wife,
and being taxed for that entire 50%. Given husband's income tax bracket,
this resulted in the wife effectively receiving about 70% of these commissions
relative to husband's share. The icing on the cake for this poor support
payor was that the former attorney also didn't have a good understanding
of the husband's base salary, so that wife's attorney successfully
argued that husband's base salary should be inputted as $12,500 ($149,500/year),
which wasn't in fact the case, and so husband's temporary SS and
CS numbers were further inflated beyond what he actually received each
month by $2,500. As a result, he was ordered to pay support based upon
phantom income and then was not able to use the January bonus income to
'catch up' and so in a position to repay the money he had borrowed
to enable him to pay for his own living expenses. When he retained our
office, while earning about $200,000 a year gross on paper, he was renting
a room in a friend's house because he was left with so little money.
Needless to say, he resented that he worked 60 hour weeks and had less
than nothing to show for it.
On the eve of trial we were able to clean this all up, along the lines of the
Ostler & Smith percentages discussed below, but before we'd come on board these mistakes
had cost the client about $80,000 and made it impossible for him to live
at close to the level that wife was able to enjoy for the eighteen months
from the start to finish of the case. It was a sad thing to observe the
anger that the husband had towards both the former wife and their children
as a result of the perceived unfairness of his economic situation (the
mother repeatedly told the kids that their father was trying to cheat
them all because given the Court's initial 50% of bonus order she
had unreasonable expectations about what percentage she should continue
Please, if bonus income is an issue in your case, get it right at the outset.
Bonus Income and Child Support Statutes
There is no question but that bonuses are considered a component of "income"
for purposes of child support awards, and that makes sense.
Family Code section 4058 generically provides that "annual gross income ... means income from
whatever source derived" and subsection (1) identifies bonuses within
Family Code section 4064 expressly authorizes courts to adjust child support orders to reflect
the effects of seasonal or fluctuating income of either parent. Such circumstances
may include income from special compensation, in addition to salary, but
obviously applies specifically to people who earn commissions. Section
4064 enables courts to base support orders on the totality of both parties'
This rules make sense because, as a matter of public policy, "A parent's
first and principal obligation is to support his or her minor children
according to the parent's circumstances and station in life."
Family Code section 4053(a). Few parents would dispute this sentiment,
at least openly, although many might complain that it is the custodial
parent and not the child who tends to benefit from child support, or child
support in excess of some minimum threshold; our legislature has not prioritized
the payment of alimony in quite the same terms. Such a possibly narcissistic
view usually has more to do with unresolved resentments towards the other
parent than it does with reality - although certainly there are parents
who don't pass the support benefits onto their children but use child
support for more selfish purposes.
What Are Ostler & Smith Awards - also known as Smith-Ostler's?
Family court treatment of bonus income for purposes of calculating spousal
and child support orders is not new, but there aren't a lot of reported
(i.e., published) decisions on the subject. The cases you might read are
Marriage of Ostler & Smith (1990) 223 Cal.App.3d 33,
Marriage of Mosley (2008) 165 Cal.App.4th 1375, and
Marriage of Tong & Samson (2011) 197 Cal.App.4th 23; there aren't any other important cases
in this area. Accordingly, given this dearth in case law authority there
is only limited direction for how family court bench officers ought to
exercise their discretion in ordering support to be paid from bonus earnings.
Still, there are a couple of important rules you can pull from these decisions.
The essential facts of
Ostler & Smith were these: Clyde (husband) and Vicki (wife) had a lengthy marriage of
twenty-one years. They married when they were seventeen. They raised four
children together, two of whom were minors at the time of their divorce.
By the parties' agreement, Vicki had always been a stay-at-home Mom,
sacrificing her own education and career opportunities as she served in
that role while Clyde obtained a master's degree in banking. He became
an increasingly successful banking auditor, who was still enjoying an
upward trajectory when the parties separated and instituted legal proceedings
and by the time of the hearing that lead to the appeal he was an executive
vice-president and chief financial officer of an unnamed major bank.
The parties amicably resolved the division of their community property.
They could not agree upon spousal support, child support or attorney fees
and underwent a contested trial on those subjects. While
Ostler Smith awards are commonly seen today at the temporary spousal support stage
of the proceedings, the case itself did not involve a
pendete lite hearing (i.e., seeking temporary orders pending the final division of
the community estate) but was instead at the judgment phase. At least
as to child support, however, Family Code section 4058 today makes clear
that bonuses may be treated as it was ultimately here at the initial hearing
phases of a family law proceeding involving kids. No appellate decision
has explicitly extended
Ostler-Smith to temporary spousal support applications although it clearly happens
By the way, if you are preparing for a spousal support trial and want suggestions
on how to present that evidence, Ostler & Smith contains a great discussion
of how to analyze and present the marital standard of living and other
Family Code section 4320 factors.
Clyde started receiving significant bonuses each year which continued up
to the time of trial. On the question of how to treat this income for
purposes of support, the trial judge found "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 more fair to all parties to base
the support order on Husband's income from salary and dividends, 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." 223 Cal.App.3d at 41-42.
Therefore, the trial court was interested in developing a formula that
would take this income into account for support purposes without forcing
the parties to re-litigate the issue at the end year once the amounts
were known for sure (or the husband to seek a downward modification if
his bonuses decreased from the prior period). The judge decided to charge
ten percent (10%) for each minor child, and fifteen percent (15%) for
the wife as spousal support, for a total of 35% of the gross bonus income.
This approach was upheld on appeal.
Marriage of Mosley
Marriage of Mosley also involved judgment spousal support (and child support). There the
trial Court had previously ordered the husband to pay fifteen percent
(15%) of his gross bonus income in excess of a base amount ($447,100/year)
and twenty-one percent (21%) of the excess was characterized and ordered
as additional child support. This was not the order appealed from, so
we cannot say from the reported decision itself whether, under circumstances like
Ostler-Smith (spouse and two minors), a combined amount of 36% is acceptable or not
- although we certainly can say that given the total combined amount of
35% as in
Ostler-Smith that 36% would not have been an abuse of discretion - the
Mosley court in no way implied that the 36% had been excessive. But it did recognize that
Smith-Ostlers can become excessive if they leave the supporting spouse with nothing
left for paying their own expenses, especially if a trial court merely
assumes that the support obligor will be made whole with a year-end bonus
that may never materialize. Again, there was no discussion of whether
it is fair to charge these percentages off of gross verses net income
Mosley the trial court had evidently ordered the husband to pay the percentages
off of gross income, so that presumably the wife would have been charged
for the spousal component as deductible alimony.
Marriage of Tong and Samson - Temporary Support Orders
Tong & Samson involved an appeal from a temporary spousal support order that had been
based upon variable monthly commissions, where an
Ostler-Smith award had previously been ordered but then later the payor husband lost
his job and the wife felt his severance pay should be treated like a bonus.
There were no children or child support issues. As with
Mosley, Tong & Samson dealt with the downstream consequences of a percentage
award and not on the original establishment of the award. The trial court
had originally ordered him to pay 35% as spousal support of all his gross
income in excess of $45,000/month. Upon being terminated the wife sought
to impose the
Ostler-Smith percentage against the husband's lump sum severance payment. The trial
court agreed with the wife and called the severance pay a "bonus"
but that determination was deemed to be in error, and accordingly the
ruling was reversed. The Court did not comment on the 35% for additional
spousal support alone because it did not need to reach that issue, since
the 35% award had not been appealed. I would not read this case as meaning
that 35% is appropriate at the temporary spousal support phase, since the
Tong & Samson trial court was not required to look at the judgment support
section 4320 factors which had been specifically addressed in
Ostler & Smith.
Suggestions for Dealing With Bonus Income Issues
Given that there are only three reported decisions in California that discuss
these types of percentage support awards, it is very difficult to know
where to draw the lines. Here are some thoughts if you face a fluctuating
commission or bonus type situation:
- Percentage awards in child support cases will be upheld on appeal whether
at the temporary or judgment (including post-judgment) phases of the case.
There is express statutory authority for these types of child support
awards. These percentages will be applied to gross income. Obviously there
is no tax deduction for child support in any event.
- Ten percent (10%) per child, and twenty-percent (20%) in the aggregate,
certainly passes muster. But what happens if a family includes three or
more children? Would it matter if there is, or is not, a spousal support
obligation as well? Probably not!
Percentage awards in spousal support awards will be upheld at least up
to sixteen percent (16%). The Court has discretion to apply those percentages
to gross income or net income, but will likely apply them to gross earnings
- especially if the trial court renders a statement of decision that shows
that all the 4320 factors were considered. At the same time, argue per
Mosley that the supporting spouse at some point has insufficient funds to live
on. This argument may be more successful with lower earners. All the
Smith & Ostler cases involve very high earnings.
- It is essential that a self-represented payor, or their attorney, ask the
Court at the time the additional spousal support award is made to specify
that it is taxable income to the recipient, and deductible by the supporting
party. If the court declines and you are at the pendente lite stage request
the Court to retain jurisdiction to revisit the issue at time of trial
if you are at the pre-judgment phase of the case.
You likely won't gain traction in arguing that there is no authority for
Ostler-Smith orders at a
pendente lite spousal support hearing. But you can try: the
Smith-Ostler decision included a detailed analysis of both the legislative history
of the predecessor statute to Family Code section 4320 and the trial court
findings over what we now call the
"4320 factors". You could also use this information to advocate for a percentage that
is less than fifteen or sixteen. If the bonuses only begin to be received
after the parties' separation or after a Judgment, argue that they
should not be considered at all for purposes of spousal support because
they cannot be part of their parties' living standards.
- Always fix a monthly income floor so that the percentages apply only to
the excess to avoid double-dips, i.e., a percentage of commissions or
bonuses in excess of $X/month and ensure that the $X/month is the number
that is inputted into the guideline support program.
- If you are the payor, you may want to argue for a cap, especially where
the percentage of bonus income if paid out will exceed the marital standard
of living. For instance, with a base salary of $!0,000/month and bonuses
ranging between $0 and some number (that depends upon your facts) like
$25,000/month, that the first $25,000 is subject but that nothing after
$25,000 will be included. Commissions and fluctuating income are confusing
to payors and their spouses, because it sometimes seems that the employee
is playing games with the income, and that he or she and not the employer
controls whether they are paid out and when. This creates the possibility
that the Court will input too high a number as the base salary. If a person
receives a fixed amount per month and the balance due them is turned over
to them at the end of the year, if a higher is used that accurately reflects
what they receive their base spousal and child support obligation will
also be skewed higher.
- Always consider submitting a declaration from the party's employer
describing how bonus income is decided and to establish that the employee
is not pulling his employer's strings or misrepresenting the facts,
since the party themselves may not be believed without corroboration.
- If you represent or are the support obligor and are self-employed, be sure
to factor in and deduct business expenses before the bonus income is calculated.
- Consider whether, if you are a payor, you might be better off requesting
that the Court take your prior year's income - including whatever
bonus was then received, and then inputting that entire number into the
support calculator (if the issue is child support or temporary alimony).
If your next bonus is less than the year used, this will hurt you but
if it is more and so long as there are no percentages, this will help
you. Understand that courts typically apply Ostler-Smith percentages only
when it is specifically requested by one of the parties; otherwise, the
Court usually just looks to the information at page 2 on your FL-150 or
at your prior year's tax return. It may behoove you not to bring the
bonus question to the attention of your family court bench officer.
- If you do wind up overpaying support at the temporary phase of the proceedings
because bonus assumptions turned out to be wrong, consider arguing that
the Court should equalize this overpayment as on the of Family Code "4320
factors" whether as a 'hardship' or additional equitable factor.
And, as always, good luck out there!
if you want to vote to tell us what more you want us to write about, a
FB like on the pages of interest answers that question for us!
Thurman W. Arnold, III, CFLS