Depending on your situation, surrogate compensation may be taxable. However, because gestational surrogacy is still so new to the United States, there is a lot of conflicting information about this subject. When you’re a gestational carrier asking, “Is income from being a surrogate taxable?” you may not find the straightforward answers you’re looking for.
In this guide to surrogate mother income tax, we’ll talk about:
- The situations in which surrogate compensation is taxable
- How you may be able to avoid taxes on surrogacy compensation
- Who the best person to talk to about this topic will be
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Disclaimer: This information should not be taken as legal advice. Please speak with a local tax lawyer for information on tax laws in your state.
Do Surrogate Mothers Have to Claim Income?
Surrogate compensation is a rather rare form of “income,” even with gestational surrogacy rising in popularity. When tax season rolls around, it’s normal for surrogates to wonder whether their surrogate compensation is taxable — and whether they have to report it to the Internal Revenue Service.
The best way to determine whether you, as a surrogate, must pay taxes? Whether or not you received a 1099-MISC form from your intended parents, your surrogacy professional, or your escrow service.
Most surrogacy professionals and intended parents won’t issue 1099 forms, but that doesn’t necessarily make your surrogate compensation free from taxes. It simply means that the parties to the surrogacy contract have established a policy of not issuing federal taxation forms. Whether or not this is correct protocol is up for debate. There are no current court cases to turn to when determining the best path for a gestational carrier in regards to her compensation payments.
Here’s the short answer: If you receive a 1099-MISC for your compensation, you must claim income on your taxes.
Do Surrogate Mothers Have to Pay Taxes Without a 1099?
But, what if your surrogacy partners don’t issue a 1099? Is surrogate money taxed in this situation?
Before we get into the details of taxes on surrogacy compensation, remember this: The information in this article should not be taken as financial or legal advice. While we’ve tried our best to present accurate information, we cannot guarantee its validity. We advise all surrogates speak with a local tax accountant before making any final decisions on their federal tax forms.
Often, the question of whether a surrogate mother will pay taxes first arises during the drafting of her surrogacy contract. Any good surrogacy lawyer should make sure to include a clause that holds intended parents accountable for any taxes that a gestational carrier may or may not be expected to pay on her compensation. As soon as you have a surrogacy attorney, talk with them in depth about this process to make sure you understand what taxes (if any) you might expect to pay after your surrogacy journey. You and your intended parents should always be on the same page about this topic before your surrogacy contract is finalized and signed.
In the debate about whether income from being a surrogate is taxable or not, the answer often comes down to the language used in the surrogacy contract and the tax laws of the state where a surrogate resides. In your research, you may find a few phrases thrown about:
- “Gift”: Some accountants can avoid certain taxes on surrogate compensation by claiming a percentage of the compensation as a “gift” from the intended parents. However, compensation usually is higher than the annual exemption for gift tax, so surrogates may need to pay taxes on a portion of their compensation payments.
- “Pain and suffering”: Some accountants and surrogacy professionals will avoid taxation by claiming that surrogate compensation is payment for pain and suffering. How well this holds up in court is debatable; after all, a gestational carrier is voluntarily entering into this process of “pain and suffering,” which may negate that tax-exemption status.
- “Pre-birth child support”: Child support is tax-exempt, so some attorneys word compensation as pre-birth child support in order to protect carriers from taxes. But, there is no legal standard for “pre-birth” child support, so enforcement and legal interpretation may vary.
As mentioned, because there are no court cases setting a precedent for this topic, the effectiveness of this language is up for debate. When it comes to taxes on surrogacy compensation, it’s a good idea not to assume anything without the assistance of a professional.
Who Should I Talk to About Surrogacy Compensation Taxes?
As a prospective or former surrogate, you may be frustrated at the lack of information surrounding surrogate mother income tax. We completely understand; tax policies in the United States can be very confusing, even without throwing gestational surrogacy into the mix.
That’s why we encourage every former surrogate to contact the IRS. This is the best place to find out whether your compensation should be declared as income and, thus, is taxable. Waiting too late and filing your taxes incorrectly can lead to penalties and other inconvenient situations, such as audits.
In addition to experts at the IRS, a local tax professional and your surrogacy attorney are great resources as you determine whether your surrogate compensation is taxable or not. They can decipher the language in your surrogacy contract and your local tax laws to determine the best course of action for your situation.
Talking to a Surrogacy Professional About Your Compensation
Many aspects of the surrogacy journey are complicated, and post-surrogacy taxes are no exception. When in doubt, please reach out to your surrogacy professionals. They should guide you through every step of the surrogacy process to help you have the least stressful journey possible.