As we enter the tax season, many surrogates are starting to prepare for tax filing, and it’s important to be aware of the financial responsibilities that come with being a surrogate. Surrogacy is a life-changing experience for many individuals or couples who wish to grow their family but are unable to do so naturally. The process involves a woman (the surrogate) carrying and delivering a child for intended parents who cannot conceive or carry a child themselves. While surrogacy offers a tremendous gift to those who want to have children, it also involves legal, emotional, and financial complexities—one of the most commonly overlooked being the question of taxation.
Many surrogates are unaware that the compensation they receive for their role is considered taxable income by the IRS. If you're a surrogate or are considering becoming one, it’s important to understand the tax implications so that you can navigate the process with clarity.
Is Surrogacy Compensation Taxable?
The IRS classifies surrogacy compensation as taxable income. According to IRS guidelines, the money paid to a surrogate mother for carrying a child on behalf of intended parents is considered "earned income" and is subject to federal income tax, Social Security, and Medicare taxes. This is true whether the compensation comes in the form of a lump sum, installment payments, or reimbursements for medical and other related expenses.
For surrogates, this means that the payments they receive are treated just like any other income they earn from employment or self-employment. If you are a surrogate, the intended parents or the agency managing the surrogacy should provide you with the proper documentation, such as a 1099-MISC or a 1099-NEC form, to report the payments.
How Much Tax Will a Surrogate Have to Pay?
The amount of tax a surrogate will owe depends on several factors, including the total amount of compensation they receive, their overall income for the year, and their tax filing status.
Federal Income Tax: Surrogates will be required to report the compensation as part of their total taxable income. The IRS applies standard tax brackets to determine the amount of federal income tax owed, which ranges from 10% to 37% depending on the income level.
Self-Employment Tax: Since surrogacy compensation is often considered self-employment income, it may also be subject to self-employment tax. This tax helps fund Social Security and Medicare. The rate for self-employment tax is 15.3%, which is divided into 12.4% for Social Security and 2.9% for Medicare.
State Income Tax: In addition to federal taxes, the surrogate may also owe state income tax, depending on the state they reside in. Some states have no income tax, while others may have significant rates. It’s essential to consult with a tax professional to determine your state tax obligations.
Medical and Other Reimbursements: Often, intended parents will cover medical expenses and other associated costs of surrogacy. In some cases, medical reimbursements may not be taxed, but this can vary depending on the nature of the payment and the overall agreement. Consulting with a tax professional is advisable to determine whether these reimbursements are taxable.
What Deductions Can Surrogates Claim?
One of the potential benefits for surrogates is that they can claim certain deductions related to their surrogacy services. For example, any out-of-pocket medical expenses that are not reimbursed by the intended parents may be deductible. Similarly, if the surrogate incurs expenses related to travel or lost wages for medical appointments, these could also be potential deductions.
It’s essential to maintain thorough records of all expenses related to the surrogacy process, as this documentation will be vital during tax filing.
How Can Surrogates Manage Their Taxes?
Given the complexity of surrogacy compensation and the various taxes that may apply, it’s highly recommended that surrogates seek professional tax assistance to ensure they are fulfilling their tax obligations correctly. A tax preparer who specializes in surrogacy or self-employment taxes can help clarify the process and ensure that any deductions or credits are utilized to reduce taxable income.
Some steps surrogates can take to manage their taxes include:
Set aside a portion of your payments: Since surrogacy compensation is taxable, it’s a good idea to set aside a percentage (e.g., 25-30%) of each payment to cover the tax liability.
Keep detailed records: Track all payments, medical expenses, and any out-of-pocket costs you incur during the surrogacy process.
Work with a tax professional: Consult a tax expert to ensure you're meeting your tax obligations and taking advantage of any deductions.
Conclusion
While surrogacy is a generous and rewarding experience, it comes with tax responsibilities that must be understood and managed. At ACRC, we guide our surrogates through the process and ensure they have the resources they need to navigate the financial aspects of surrogacy. By understanding how surrogacy compensation is taxed and working with a tax professional, surrogates can ensure they meet their tax obligations without any surprises.
If you’re considering becoming a surrogate or are currently on your surrogacy journey, make sure to plan ahead for taxes, track your expenses carefully, and seek professional guidance to make the process as smooth as possible.
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