The due dates for taxes are just around the corner, which means that it’s time to start gathering all the essential forms. But before you get started on filling out your important information, you’re probably starting to wonder if surrogate mothers have to pay taxes on any compensation they receive.
The answer to that question can be a little tricky. After all, figuring out what you need for your taxes can be frustrating even without having to throw gestational surrogacy into the mix. But with the help of this guide, we’re sure that you’ll find the answer you’re looking for.
Before we get too deep into the article, we want to give a quick word of warning: While we have tried our best to provide most if not all the information you need for this busy season, this article should not be taken as legal or financial advice. We strongly recommend that you speak with a local tax accountant before making any decisions.
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Do Surrogate Mothers Have to Claim Income?
If you’ve already received your surrogacy compensation recently, then it’s normal to start wondering about potential taxes on them – especially considering that the typical amount you can receive is around $30,000. Now that April is almost here, figuring out whether or not you have to claim it as income will make a huge difference in how you do your taxes.
The answer to this question really comes down to whether or not you receive a 1099 — the form commonly used by independent contractors and those who are self-employed. If you receive a 1099-MISC from your intended parents, your surrogacy specialist, or escrow service, then you will definitely need to claim to your compensation as income. And once it is claimed as income, it’s considered taxable.
But What Happens if I Don’t Receive a 1099? [What You Should Know]
If you end up receiving a 1099, then a lot of the guesswork is taken out for you because you’ll know you’ll need to claim your compensation as income. But if you don’t receive a 1099, is that money still considered taxable?
The answer to this question really depends. Ideally, you’ll want to start talking about potential taxes with your attorney way before you receive your actually compensation, which should happen when you draft your surrogacy contract. A good surrogacy attorney will talk with you in depth about what you need to know about what taxes (if any) you’ll need to pay on your compensation and about the legal process.
Most of the time, a surrogacy attorney will be able to find a reason to prevent a gestational surrogate from needing to pay taxes on their compensation. But it all comes down to how your compensation is addressed in your contract.
But Can’t Surrogacy Compensation be Considered a Gift? [Other Questions to Ask]
If you’ve gotten a head start on your research for tax season, then you might have come across different terms that might make it so that you’re exempt from having to pay taxes on surrogacy compensation. These situations vary widely, as some surrogate agencies and sources cite one opinion over the other.
However, there are a few instances in which your compensation might not be tax-exempt. These are:
Gift: In some cases, your account can avoid some of the taxes by claiming them as a gift from the intended parents. But it’s important to keep in mind that the amount of compensation that you’ll receive is usually higher than the amount you’ll be exempt from. So, you might end up paying a portion of your taxes from your compensation.
Pain and Suffering: There are some sources, surrogacy professionals, and accountants that believe that if any compensation was received for pain and suffering, then the income can be considered non-taxable under Sec 104 of the Internal Revenue Code (IRC). However, surrogacy doesn’t exactly meet the list of excludable injuries listed under the section, such as someone who has experience some form of bodily injury or another type of accident, such as a burglary. So, whether or not surrogacy compensation can actually be claimed for “pain and suffering” and is therefore tax-exempt if a surrogate enters her contract willingly is still pretty divisive.
Pre-Birth Child Support: Because child-support payments are exempt from taxes, there are some attorneys that word surrogacy compensation as pre-birth child support in order to avoid tax liability. But how well this reason will hold up in court is still debatable.
Who Should I Talk to Next?
Getting your taxes done can be frustrating at the best of times. But just because it’s difficult doesn’t mean that it’s impossible. Before you get started on your taxes, it’s a good idea to speak with a financial advisor, or a surrogacy specialist who can help answer your questions about any potential taxes for your compensation.