Most of the time, compensation made for surrogacy services is taxable income according to U.S. federal law. The Internal Revenue Service (IRS) considers surrogacy money income for services rendered, which thus needs to be reported in the tax return. However, it can be reported as different taxable income depending on the states and laws governing the nature of the surrogacy arrangement and the type of payments made.
How the IRS Views Surrogacy Income
As of now, there are no dedicated IRS guidelines concerning surrogacy income. The IRS will, instead, apply general income tax principles. The Internal Revenue Code Section 61 states all income “from whatever source derived” is taxable unless there is a specific legal exclusion. Therefore, since there are no legal exclusions for surrogacy payments, the payments received for surrogacy will be taxable.
Typically, with a gestational surrogacy arrangement, where the surrogate carries a child for the intended parents and is paid a lump sum or receives payments over time, the IRS considers this as self-employment income. This means they are liable for tax on their earnings and will be responsible for federal income tax as well as self-employment tax which includes tax for Social Security and Medicare.
When Surrogacy Money May Not Be Taxable
There are limited situations where surrogacy payments might not be taxable:
- Reimbursement-only arrangements: If the surrogate is only reimbursed for actual medical or pregnancy-related expenses, and no profit is made, those reimbursements are generally not taxable.
- Medical expense coverage: Payments made directly to healthcare providers for the surrogate’s medical care are typically not considered taxable income to the surrogate.
However, if any portion of the payment exceeds actual costs or represents compensation for time, effort, or discomfort, it usually becomes taxable.
Reporting Surrogacy Income
If a surrogate receives more than $600 in payments from intended parents or an agency, they may be issued a Form 1099-NEC, which must be reported to the IRS. Even if no form is issued, surrogates are still legally required to report the income on their tax returns.
Conclusion
In most cases, surrogacy money is taxable income and must be reported to the IRS. Since each arrangement can vary, it’s essential to consult a qualified tax professional familiar with surrogacy agreements and self-employment taxation to ensure compliance and avoid unexpected tax liabilities.
Schedule a confidential consultation to confirm what’s taxable in your surrogacy payments and get a clear filing plan. Dimov Tax stands ready to present expert assistance.