Surrogacy Income and Taxes – Do You Pay Taxes on Surrogacy Compensation?

Do You Pay Taxes on Surrogacy Compensation

If you are looking to become a Gestational Surrogate, you may have already thought about what you are going to do with the monetary compensation. Perhaps you are going to use it to make an advance payment for a new house or save it up for your child’s college education. You may have even decided to take your friends and family on vacation at the end of your surrogacy journey.

But have you ever thought about the possible taxes on your Surrogate compensation?

Your Surrogate compensation may be taxable or nontaxable based on your specific situation. However, there is a lot of conflicting information flying around about this topic, probably because gestational surrogacy is still comparatively new to the US. So, you may not get clear answers if you are a Surrogate asking whether your income from surrogacy is taxable or not.

That’s why we have created this comprehensive article about Surrogate Mother income tax. Here, we will discuss the situations in which Surrogate compensation can be taxed, how you may prevent taxes on your compensation, and who to speak to about this important subject.

Note that the information contained in this article cannot be considered legal or financial advice. We recommend that you talk to a local tax attorney for information about your state tax laws.

Do Surrogate moms have to claim income?

Although gestational surrogacy is becoming more and more popular in the United States, Surrogate compensation is still an uncommon type of “income.”

When it is time for tax, it’s normal for Gestational Carriers to ponder whether their “income” from surrogacy is taxable and whether they should report it to the IRS (Internal Revenue Service).

The best way to know if you, as a Surrogate Mother, need to pay taxes is if you are given a 1099-MISC form by your surrogacy agency, Intended Parents, or escrow service.

While Intended Parents and surrogacy agencies do not usually give 1099 forms, that does not mean that your Surrogate compensation is tax-free. What it means is that your surrogacy partners have a policy of not giving Surrogates federal taxation forms. It is debatable whether or not this is the right thing to do.

Presently, there are no court cases to use as a reference when determining the best path for a Surrogate to take regarding her compensation.

The short answer is, if you get a 1099 form for your compensation, you surely need to report it as income and pay taxes on the money.

Section 61 of the Internal Revenue Code Relating to Surrogate Income

Section 61 of the Internal Revenue Code states:

“Except as otherwise provided, gross income means all income from whatever source derived.”

Surrogacy fees are not an exception, which means that a Surrogate can be taxed on her earnings from surrogacy. To make the matter worse, Gestational Carriers are offering a “personal service,” and anyone providing personal services has to pay self-employment tax and income tax as long as the money is earned during a business.

Is a surrogacy arrangement up to the level of a trade or business?

Well, this depends on the facts and circumstances surrounding each case. 

If the Gestational Carrier has gotten into such an agreement previously or wishes to do so again, then the Surrogate fees will probably be regarded as self-employment income. But if the arrangement is a one-time thing, it can be argued that it is not a business. In this case, the compensation payments could be reported as “other income” and is not subject to self-employment tax.

If the Surrogate compensation is regarded as self-employment income, you may be able to offset it with benefits that self-employed taxpayers enjoy, including the ability to make above-the-line deductions for health insurance instead of an itemized deduction. Self-employed taxpayers are also allowed to make deductible contributions to an individual retirement account (IRA) or a self-employment retirement plan, like a SEP-IRA or a solo 401k.

Do Surrogates need to pay taxes without a 1099 form? What occurs if I don’t get a 1099 form?

You may be wondering, what if my surrogacy partners don’t give me a 1099? Is the money still taxable in this case?

Getting a 1009 from your Intended Parents or agencies eliminates a lot of the guesswork, as you will already know you will have to declare your Surrogate compensation as income. But if you are not given a 1099 form, is the money still taxable?

There is no straightforward answer to this question.

It is best to start discussing possible taxes with your accountant or surrogacy lawyer long before you get your compensation payments. Most surrogacy lawyers will speak with you on this extensively and discuss the taxes you may or may not need to pay on your Surrogate compensation, as well as the legal process involved.

Most times, a surrogacy lawyer will be able to come up with a reason why a Surrogate should not have to pay taxes on her compensation. In the end, it all depends on how your compensation is addressed in the surrogacy contract.  

Can surrogacy compensation be regarded as a gift?

The answer to whether or not Surrogate compensation is taxable usually boils down to the tax laws in your state of residence and the legalese used in your surrogacy contract.  Below are some phrases you may come across during your research:

  • “Gift.”  Tax accountants may be able to avoid some taxes on Surrogate compensation by claiming that a portion of the money is a “gift” from the intended parents to the Surrogate. But compensation is often more than the yearly exemption for gift tax, so Surrogate Mothers may have to pay some taxes on a part of their compensation money.
  • “Pain and suffering.” Surrogacy experts and tax accountants can also help avoid taxation by claiming that the money the Surrogate receives is for her pain and suffering.  But it is uncertain how well this argument will hold up in court because the Surrogate voluntarily signs up for this process of pain and suffering, which can invalidate that tax-exemption status.
  • “Pre-birth child support”: Some attorneys can help Surrogates avoid taxes on their compensation by claiming that the money is for pre-birth child support because child support payments are not taxable. However, enforcement and interpretations may differ since there is no legal standard in place for pre-birth child support.

As said earlier, due to the lack of current court cases that can be used as an example for this subject, the effectiveness of this language is debatable. That’s why it is good to seek the help of a professional and not assume anything regarding the taxes on Surrogate compensation.

Who do I need to speak with about Surrogate compensation taxes?

The lack of information regarding Surrogate Mother income tax can be frustrating if you are a prospective or an ex Surrogate. It is true that US tax policies can be confusing, even without adding gestational surrogacy into the picture.  

This is why we recommend that all Surrogates contact an accountant or the IRS themselves. They can provide you with information as to whether your Surrogate compensation should be reported as income and is, therefore, taxable.

Aside from the experts at the IRS, your surrogacy lawyer and a local tax professional are good resources to turn to when trying to find out whether your income from surrogacy is taxable or not. They can help interpret the legalese in your surrogacy contract and your state tax laws to determine the best thing to do in your case.

If my journey spans two different years, should I file the income every year or at the end of the surrogacy journey?

Each surrogacy journey is unique, and each state has its own laws regarding taxable income. We suggest that you discuss your particular situation with your tax accountant to know the best course of action.

My state of residence does not have income tax; do I still need to pay taxes on the money gotten from being a Surrogate?

As we said earlier, you should direct questions about income taxes to your personal tax accountant, who is well versed in the tax laws in your state.

We hope you have found the answers you were looking for. We can always help you with further details if required. If you are interested in becoming a Surrogate Mother, simply fill out the application and find out whether you qualify within 72 hours.

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