If you are looking to become a Gestational Surrogate, you may have already thought about what you will do with monetary compensation. Maybe you’ll use it to make a down payment on a new home or save it 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 Replacement compensation may or may not be taxable based on your particular situation. However, there is a lot of conflicting information flying around about this topic, perhaps because gestational surrogacy is still relatively new in 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’ve created this comprehensive article on Surrogate Mother income tax. Here, we’ll discuss the situations in which Surrogate compensation may be taxable, how you can prevent taxes on your compensation, and who to talk to about this important topic.
Remember that the information contained in this article should not be considered legal or financial advice. We recommend that you speak with a local tax attorney for information about your state’s tax laws.
Fill out an Application
Do Surrogate moms have to claim income?
Although gestational surrogacy is becoming more popular in the United States, surrogate compensation is not a common type of “income.”
When it’s tax time, it’s normal for Gestational Carriers to wonder if their “income” from surrogacy is taxable and if they should report it to Internal Revenue Service.
The best way to find out if you, as a Surrogate Mother, have to pay taxes is if you are given a 1099-MISC form by your surrogacy agency, Intended Parents, or escrow service.
Although Intended Parents and surrogacy agencies do not typically provide 1099 forms, that does not mean that your Surrogate compensation is tax-free. This means that your surrogacy partners have a policy of not providing Surrogates with federal taxation forms. It is debatable whether this is the right thing to do or not.
Currently, there are no court cases that can be used as a reference when determining the best path a Substitute should take regarding his compensation.
The short answer isif you get a 1099 form for your compensation, you definitely have to report it as income and pay taxes on the money.
Section 61 of the Internal Revenue Code Relating to Alternative Income
Section 61 of the Internal Revenue Code states:
“Unless otherwise provided, gross income means all income from whatever sources derived.”
Surrogacy fees are not an exception, which means that a Surrogacy may be taxed on her earnings from surrogacy. To make matters worse, Gestational Carrier offers “personal service,” and anyone who provides personal services must pay self-employment tax and income tax as long as the money is earned in the course of a business.
Is a surrogacy arrangement up to the level of a trade or business?
Well, it depends on the facts and circumstances surrounding each case.
If the Gestational Carrier has entered into such an agreement previously or wishes to do so again, then the Surrogate’s fees are likely to be treated 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, compensation payments can be reported as “other income” and not subject to self-employment tax.
If the Replacement compensation is considered self-employment income, you can offset it with benefits enjoyed by self-employed taxpayers, including the ability to take the above deductions for health insurance instead of a -itemized deduction. Self-employed taxpayers are also allowed to make deductible contributions to an individual retirement account (IRA) or a self-employment retirement plan, such as a SEP-IRA or a solo 401k.
Do Substitutes have to pay taxes without a 1099 form? What happens 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 agency takes a lot of the guesswork out of it, because you already know you have to declare your Surrogate’s compensation as income. But if you are not given a 1099 form, is the money still taxable?
There is no direct answer to this question.
It is best to start discussing possible taxes with your accountant or surrogacy lawyer before you receive your compensation payments. Most surrogacy attorneys will talk to you about this at length and discuss the taxes you may or may not have to pay on your Surrogate payment, as well as the legal process involved.
Often, a surrogacy lawyer can provide a reason why a Surrogate should not 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 considered a gift?
The answer to whether surrogacy compensation is taxable or not usually depends on the tax laws in your state of residence and the legal provisions used in your surrogacy contract. Below are some phrases you may come across during your research:
- “Gift.” Tax accountants can avoid certain Surrogate compensation taxes by stating that a portion of the money is a “gift” from the intended parents to the Surrogate. But the compensation is often more than the annual gift tax exemption, so Surrogates may have to pay some taxes on a portion of their compensation money.
- “Pain and suffering.” Surrogacy experts and tax accountants can also help avoid taxation by saying 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 Substitute voluntarily signed up for this process of pain and suffering, which could invalidate that tax-exemption status.
- “Prenatal child support”: Some attorneys can help Surrogates avoid taxes on their compensation by saying the money is for pre-birth child support because child support payments is not taxable. However, implementation and interpretation may differ as there is no legal standard for prenatal support.
As stated earlier, due to the lack of current court cases that can be used as examples for this topic, the validity of this language is debatable. That’s why it’s best to seek professional help and not assume anything about Surrogate compensation taxes.
Who do I need to talk to about Replacement compensation taxes?
The lack of information about Surrogate Mother income tax can be frustrating whether you are a prospective or an ex Surrogate. It’s true that US tax rules can be confusing, even without adding gestational surrogacy to the picture.
This is why we recommend that all Substitutes contact an accountant or the IRS itself. They can provide you with information on whether your Surrogate compensation should be reported as income and, therefore, taxable.
In addition to IRS experts, your surrogacy lawyer and a local tax professional are good resources to turn to when trying to figure out whether or not your surrogacy income is taxable. 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 each 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 recommend that you discuss your specific situation with your tax accountant to determine the best course of action.
My state of residence has no income tax; Do I still have to pay tax on the money gained from being a Surrogate?
As we said earlier, you should direct questions about income taxes to your personal tax accountant, who is familiar with the tax laws in your state.
We hope you found the answers you were looking for. We can always help you with additional details if needed. If you are interested in becoming a Surrogate Mother, simply fill out the application and find out immediately if you qualify.
For any other question, feel free to use the chat option.
Fill out an Application
