Every January or February there are a flood of questions regarding surrogacy taxes. Are surrogate mothers responsible for paying income tax on the compensation they receive in surrogate motherhood?
How much money needs to be paid to the government? Do they consider surrogate compensation taxable income? It’s a tricky question, and depends on several things.
First and foremost, it is recommended that you discuss the possibility of surrogacy taxes with both your surrogacy attorney and your tax attorney. Many times, the way a contract is worded makes all the difference as far as Uncle Sam is concerned.
If you decide to call the IRS and ask them directly, you will most likely get a variety of answers, most of which encourage you to pay income taxes on your surrogacy compensation. But that doesn’t necessarily mean that you are legally obliged to do so.
Most surrogacy agreements state that the compensation and reimbursement the surrogate mother receives is for “pain and suffering” or “pre-birth child support” both of which are rarely taxed. Because of this, many surrogate mothers choose not to report such compensation. After all, it is not earned income, it is compensation.
The truth of the matter is, that many surrogates choose to pay income taxes while many do not. After speaking with your lawyers, you will need to decide what works in your situation. But there are a few more points to consider if your surrogacy compensation is taxed.
First, an additional $20,000 in what the IRS considers income in a given year will quite probably put you into a higher tax bracket. That means that the compensation will be taxed at a higher rate than your other income. It could also prevent one from qualifying for Earned Income Tax Credit, if applicable.
Then there is the matter of state taxes. If your compensation is considered income by the IRS, then your state will also consider it income and will tax it as well.
The taxes from both the state and federal government, coupled with the loss of the EITC, could cut the total compensation amount a surrogate mother receives in half, if not more. And if your surrogacy compensation is split over two calendar years, it could double this problem.
It is a good idea to think about and discuss surrogacy taxes prior to starting a surrogate motherhood journey. That way there are no surprises later down the road.