Do You Have to Pay Taxes on Surrogacy Money?

The tax treatment of money received for acting as a surrogate is an area of financial uncertainty, as the Internal Revenue Service (IRS) has not provided definitive guidance on whether these payments constitute taxable income. This lack of a clear rule has led to two primary, conflicting interpretations of the law. This ambiguity creates a complicated financial and legal situation for both the surrogate and the intended parents.

The Argument for Non-Taxable Income

A prominent argument is that compensation paid to a surrogate should not be considered taxable income. This perspective frames the payments as compensation for physical hardship, personal inconvenience, pain, and suffering. Under Internal Revenue Code Section 104, proceeds received from a lawsuit or settlement for personal physical injuries or sickness are generally excluded from a taxpayer’s gross income. Proponents of this view align the physical demands of pregnancy and childbirth with the types of physical burdens this exclusion is meant to cover.

The physical toll of pregnancy forms the foundation of this argument. From this viewpoint, the surrogate is not being paid for a job in the traditional sense but is being compensated for the temporary use and strain on her body. This interpretation rejects the idea that surrogacy is a “service,” emphasizing that compensation is tied directly to the physical processes involved. The payments are seen as a way to make the surrogate whole for the physical ordeal she undertakes.

The Argument for Taxable Income

The opposing view holds that payments to a surrogate are taxable. This argument classifies the compensation as income earned for providing a specific personal service: a gestational service. From this perspective, the surrogate operates as an independent contractor, and the funds received are self-employment income. This classification subjects the income to both ordinary income tax and self-employment taxes, which cover Social Security and Medicare contributions.

The basis for this argument lies in the structure of most surrogacy arrangements, which are governed by detailed legal contracts that specify duties and payment schedules. This contractual nature reinforces the idea that the surrogate is being compensated for performing agreed-upon services. This interpretation is supported by Internal Revenue Code Section 61, which defines gross income as “all income from whatever source derived” unless an exception applies. Since there is no specific exception for surrogacy compensation, this view maintains that the payments must be included as taxable income.

Tax Reporting for Surrogates

A surrogate’s tax reporting obligations often begin with the receipt of a Form 1099-NEC, Nonemployee Compensation, or a Form 1099-MISC, Miscellaneous Information. These forms are used by payers to report payments made to the IRS. Receiving one of these forms indicates that the payer has officially reported the payment, and the IRS will expect to see the corresponding income on the surrogate’s tax return.

Upon receiving a Form 1099, the surrogate must decide how to report the income. If the surrogate adopts the view that the money is for services rendered, she would report the income on Schedule C, Profit or Loss from Business. This treats the surrogacy as a small business or independent contractor activity.

Alternatively, if the surrogate believes the income is non-taxable compensation for pain and suffering, the reporting is more complex. Some may choose to report the income on their tax return as “Other Income” and then include a corresponding deduction for the same amount. This approach requires a description explaining that it is non-taxable under the physical injury exclusion, which discloses the payment to the IRS while asserting the legal position that it is not taxable.

Tax Implications for Intended Parents

For intended parents, the primary tax question is whether they can deduct the costs associated with surrogacy as a medical expense. The IRS allows taxpayers to deduct qualified medical expenses that exceed 7.5% of their Adjusted Gross Income (AGI). According to Section 213 of the Internal Revenue Code, a medical expense must be for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the taxpayer’s own body, their spouse’s, or their dependent’s.

This rule creates a hurdle for deducting most surrogacy costs. While medical expenses for procedures performed on one of the intended parents may be deductible, the IRS has consistently held that expenses related to the surrogate are not. This position was reaffirmed in early 2025, clarifying that payments for an egg donor, IVF costs related to the surrogate, and the surrogate’s medical insurance and other fees are not deductible medical expenses for the intended parents. Consequently, the largest components of surrogacy—including the surrogate’s compensation, agency fees, and medical bills—are typically non-deductible.