Do surrogate mothers pay taxes on their compensation? Tax implications for surrogacy income?

This is definitely taxable income. The IRS has a general definition that all income is taxable unless specifically excluded by law. Just because the agency doesn't issue a 1099 doesn't mean the income isn't taxable - they're likely trying to avoid their own reporting requirements. Surrogacy compensation is generally considered taxable income, similar to how other types of compensation for services are treated. Since there's no specific exemption for surrogacy in the tax code, it falls under general income rules. The agency telling you "most surrogates don't report it" is essentially suggesting tax evasion, which is a huge red flag. You should report this on Schedule C as self-employment income, which means you'll also owe self-employment tax (Medicare and Social Security) on top of regular income tax. Keep track of any related expenses that might be deductible, like mileage to medical appointments related to the surrogacy.

I went through a similar situation last year with figuring out complex tax implications, and I found this AI tax assistant called taxr.ai that was super helpful. It analyzed our situation and gave us a really clear breakdown of how to properly report uncommon income sources. For my situation, it was able to pull up specific tax rulings and show exactly how the IRS treats various forms of "service" income that don't fit neatly into common categories. I just uploaded some documents about our situation and it explained everything in plain English. You might want to check out https://taxr.ai since surrogacy compensation is kind of a niche area where general advice might miss some nuances.

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Former tax preparer here. One thing to consider is that if the surrogacy agency isn't issuing 1099s, the IRS won't have an automatic record of the income. BUT this doesn't mean you shouldn't report it. If you get audited and they discover unreported income of $45k, you'll face penalties and interest on top of the taxes owed. The penalty for failure to report income can be substantial - usually 20% of the unpaid tax amount. Also consider that the intended parents might deduct these expenses on their taxes in some way, which could create a paper trail back to your wife.

My sister was a surrogate in 2022 and she DID report the income on her taxes. She reported it as self-employment income on Schedule C, and yes, had to pay both income tax and self-employment tax on it. She was able to deduct some business expenses like special maternity clothes she wouldn't have otherwise needed, mileage to medical appointments, and a portion of her phone bill for surrogacy-related communications. But the base compensation was definitely treated as taxable income.

As someone who's been through a similar situation, I'd strongly recommend consulting with a tax professional who has experience with unusual income situations. The general consensus here is correct - surrogacy compensation is taxable income that should be reported on Schedule C. One thing I learned is that you'll want to keep detailed records of everything related to the surrogacy arrangement. This includes the contract, payment records, any medical expenses you incurred that weren't reimbursed, and documentation of business-related expenses like travel to appointments. The fact that the agency casually mentioned that "most surrogates don't report it" is concerning. Even if that's true, it doesn't make it legal. The IRS considers all income taxable unless there's a specific exclusion, and there's no exclusion for surrogacy compensation. Better to pay the taxes now than face penalties, interest, and potential legal issues later if you're audited. Also consider setting aside about 25-30% of the compensation for taxes if you haven't already, since you'll owe both income tax and self-employment tax on the full amount.