The journey of surrogacy is often enriching and personally fulfilling, and the financial compensation recognizes the time and energy it takes to give another family the gift of a child. When making the compassionate decision to become a surrogate, it’s important to understand the intricacies of your tax obligations so that you know what you’ll owe and can save accordingly.
In this blog, we’ll dive into everything you need to know, including what you may be able to deduct and how to ensure you file your taxes properly.
Is Surrogacy Income Taxable?
In many jurisdictions, surrogacy compensation is considered taxable income. While tax implications can vary based on the state you live in and other factors, they commonly include reporting the compensation as income on your tax return, just like you would for other wages, self-employment income or investment gains. Specific details on what qualifies as taxable income depend on local tax laws and regulations. You should consult with tax professionals to ensure compliance with relevant tax codes and understand the tax implications associated with your jurisdiction.
Do Surrogate Mothers Have To Claim Income?
In the context of surrogacy, yes, the compensation paid to the surrogate mother is generally, depending on the state you live in, considered taxable income. This can include:
- Base compensation
- Medical expenses
- Legal fees
Surrogates must be mindful of how they file this compensation:
For a One-Time Surrogacy: If surrogacy is not a regular source of income, you can report your compensation under “other income” on your tax return. This method is not subject to self-employment tax, and while you cannot take any business deductions against this income, it simplifies your tax reporting.
For Recurring Surrogacy: If you are or plan to be a surrogate multiple times, you may want to consider reporting your compensation as self-employment income. This qualifies you to deduct related expenses but also requires paying self-employment taxes.
There are certain circumstances where parts of a surrogacy income might not be subject to taxation. Non-taxable income in surrogacy is less common, but certain payments may be exempt from taxation. Here are some examples:
- Gift: If you claim the surrogacy income as a gift to the intended parents, you may be able to avoid some taxation. According to Taxfully, the annual gift tax exclusion is $15,000 per recipient as of 2023. If the payment exceeds this amount, the intended parents must file a Form 709 “gift tax return.”
- Pre-Birth Child Support: Filing surrogacy compensation as pre-child support may also help avoid taxation since child support is tax-exempt, but this is unlikely to be upheld in court.
While you will probably need to pay taxes on your surrogacy income, surrogacy compensation comes with many potential deductions, including:
- Qualifying Medical Expenses: Prenatal care, delivery costs and other medically necessary treatments.
- Travel Expenses: Transportation and accommodation for medical appointments related to the surrogacy.
- Legal Fees: Fees related to the creation and review of the surrogacy agreement.
- Lost Wages: Income missed from time off work for medical appointments or recovery post-delivery.
- Health Insurance: These surrogacy expenses may be deductible if the surrogate receives health insurance coverage as part of the surrogacy arrangement and the premiums are paid directly.
Does Pain and Suffering Cover Surrogacy?
When it comes to surrogacy, there’s a common question about whether the compensation received can be classified as income for pain and suffering and, thus, be exempt from taxation.
While this may seem applicable to surrogacy, in one case, a court ruled that it is indeed taxable for surrogacy.
Nichelle Perez donated her eggs for surrogacy and believed her compensation, classified as for pain and suffering, was not taxable. However, the court’s decision contradicted this assumption, ruling that such income is taxable. This judgment establishes that all forms of surrogacy compensation, including those for discomfort or inconvenience, must be reported as taxable income.
Furthermore, surrogacy is not listed in Sec 104 of the Internal Revenue Code, so this option is not advisable. It’s important for you to get advice from tax experts who understand the intricacies of surrogacy tax rules.
How To Report and File Your Surrogacy Compensation Taxes
Once you determine your taxable income and deductions, there are several other steps involved in filing out your tax return.
- State Taxes: Stay informed about the tax regulations in your state, as they can differ. Certain states might not impose taxes on surrogacy income, while others may have distinct rules and requirements.
- Keep Detailed Records: You should keep thorough records of all income, expenses and receipts related to the surrogacy process. This includes any medical expenses, travel expenses and other costs you incur during the process.
- Form of Compensation: How you receive your compensation can influence its reporting process. Independent contractors may receive a Form 1099-MISC from the intended parents or the surrogacy agency, while employees typically receive a W-2.
- Self-Employment Taxes: If you elect to categorize your surrogacy as self-employment, you may be responsible for self-employment taxes, including contributions for Social Security and Medicare. These are in addition to your standard income tax responsibilities. However, self-employment brings additional opportunities for deductions.
- Report on Income Tax Return: At tax time, report your surrogacy income on the appropriate tax form. If you’re an independent contractor, you will likely use Schedule C, Profit or Loss From Business, or Schedule C-EZ. If you receive a W-2, you will report the income on your primary tax return form.
- Legal Assistance: Tax laws around surrogacy are complex and can vary by jurisdiction. It’s wise to consult with a tax professional or accountant who specializes in surrogacy taxation. They can provide guidance tailored to your situation, helping you navigate deductions, self-employment taxes and any other tax obligations.
Who Should I Talk to About Surrogacy Compensation Taxes?
Compensation is one of the many benefits of surrogacy, but it comes with important tax considerations that surrogates should proactively manage. While surrogacy agencies like Joy of Life® can provide initial information and resources, seeking specialized professional tax advice is essential. Consulting with a tax attorney or accountant specializing in surrogacy is key, as they possess expertise in tax law and surrogacy-related financial matters. They can assist in accurately reporting surrogacy income and understanding legal complexities, ensuring compliance with tax regulations.
Surrogates may also benefit from the guidance of surrogacy agency financial advisors and family law attorneys, who can offer insights into the structure of surrogacy compensation and the legal aspects of surrogacy contracts. For specific advice on medical expenses and compensation, a tax consultant with expertise in medical taxation can provide valuable assistance. Staying informed and working with these professionals ensures that surrogates are up-to-date with current tax laws and regulations, leading to a more informed and stress-free surrogacy journey.
Ensure Financial Clarity During Surrogacy With Joy of Life®
Embarking on a surrogacy journey entails navigating a myriad of financial aspects. While this can seem daunting, being equipped with the proper knowledge and resources is critical to confidently handling your taxable surrogacy income. By staying informed and working closely with tax professionals, you can ensure a smooth and legally sound experience, reduce liabilities and set yourself up for a stress-free surrogacy journey.
At Joy of Life®, we’re dedicated to guiding our surrogates through every aspect of their journey, including financial education and advice. Apply today to become a surrogate mother and take the first step in making a significant difference in the lives of others, all while receiving comprehensive support and compensation every step of the way.