Is Compensation for Egg Donation Taxable Income?

Egg donation offers individuals the opportunity to help others build families, often involving financial compensation for the donor’s time and effort. Understanding the tax implications of this compensation is important for donors to ensure compliance with tax regulations. The Internal Revenue Service (IRS) considers most income taxable unless specifically excluded by law. Navigating these rules can help donors manage their finances effectively.

Determining Taxability

The Internal Revenue Code (IRC) defines “gross income” as all income from whatever source derived, unless specifically excluded. This definition includes compensation for services, business income, and gains from property dealings. Compensation received for egg donation is viewed by the IRS as payment for services rendered, rather than a non-taxable settlement for personal physical injuries or sickness.

A common misconception is that egg donation compensation might be exempt from taxation under provisions that exclude income for personal physical injuries or sickness. However, the IRS and court rulings have clarified that because egg donation is a voluntary service, the compensation is not considered payment for unforeseen injury or pain and suffering. Instead, it is seen as compensation for the donor’s time, effort, and the medical procedures involved. This position aligns with the broad interpretation of gross income, meaning the compensation is subject to federal income tax.

Reporting Egg Donation Income

Donors receiving compensation for egg donation are treated as independent contractors or self-employed individuals for tax purposes. If the payment from an agency or recipient is $600 or more in a calendar year, the donor might receive a Form 1099-NEC (Nonemployee Compensation) or a Form 1099-MISC (Miscellaneous Information).

Even if a Form 1099 is not received, donors are still required to report all income received. This income is reported on Schedule C (Form 1040), Profit or Loss from Business, which is used by sole proprietors and independent contractors to detail their business income and expenses. Alternatively, if the activity is not considered a regular trade or business, the income may be reported on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, as “Other Income.”

Allowable Deductions

Individuals reporting income from egg donation may be able to reduce their taxable income by deducting certain ordinary and necessary expenses directly related to the donation process. An expense is considered “ordinary” if it is common and accepted in the industry, and “necessary” if it is helpful and appropriate for the activity. These deductible expenses help offset the gross income earned.

Examples of potential deductible expenses include travel costs, such as mileage or public transportation fares to and from medical appointments, and other direct costs incurred to facilitate the donation process that are not reimbursed. It is important for donors to maintain accurate records, including receipts, invoices, and mileage logs, to substantiate all claimed expenses. Accurate record-keeping is important in case the IRS requires verification of reported income and deductions.