Do I Pay Taxes on My Surrogacy Compensation?

Update for 2019 Taxes: Listen to what CPA Sonia Stewart, an expert in third-party reproduction finances, has to say about your surrogacy compensation and taxes on Fertility Cafe podcast episode 6 Family Building Financials – Talking Escrow and Taxes with Sonia Stewart, CPA

One question that we are frequently asked by potential and active surrogates is whether or not they will be expected to pay taxes on their surrogacy compensation.

Chances are, if we’re not being asked this question, it’s because surrogates are compassionate women who don’t choose this journey for financial gain. They often don’t like talking about compensation and are left quietly wondering how this level of increase in their annual income will impact their taxes.

When it comes to your surrogacy compensation, you should consult a tax professional to learn what your options are, and how best to proceed.

We have gathered the following information from a variety of sources regarding your compensation as a surrogate, and whether or not you will need to pay taxes on it. Please keep in mind that this is only a guide, and it should only be used to get you thinking about the various scenarios you may encounter. This information should not be taken as financial or legal advice. A CPA or tax professional will be able to advise you on your particular situation.

What are your potential taxes on surrogacy compensation?

When tax season rolls around, it’s normal for surrogates to wonder whether their surrogate compensation is taxable — and whether they have to report their pay as a surrogate to the Internal Revenue Service.

The best way to determine whether you must pay taxes is whether or not you received a 1099-MISC form from your intended parents, your surrogacy agency, or your escrow service. If you receive a 1099-MISC for your compensation, you must definitely claim income on your taxes.

Do Surrogate Mothers Have to Pay Taxes Without a 1099?

What if your surrogacy agency or intended parents don’t issue a 1099? Is surrogate compensation taxed in this situation?

Often, the question of whether a surrogate mother will pay taxes first arises during the drafting of the Gestational Surrogacy Agreement. Your lawyer may 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.

Information for this post was gathered from a variety of sources, including Surrogate.com

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