Has the IRS ruled on surrogate compensation?
No. The IRS has never issued a ruling that specifically addresses surrogate compensation, so there is no definitive answer to whether it is taxable. What exists is the general rule. Under Section 61 of the Internal Revenue Code, all income is taxable unless a specific exclusion applies, and no exclusion names surrogate compensation. For that reason, tax professionals generally treat base compensation as taxable income.
Some commentators have argued that compensation for the physical demands of pregnancy resembles a payment for physical injury, which the tax code can exclude from income. The IRS has not accepted or rejected that argument for surrogacy, and relying on it without advice is a risk. Until there is a ruling, the cautious plan is to treat base compensation as taxable and let a CPA tell you if your situation is different.
Private Label Surrogacy is not a tax advisor, and this page is not tax advice. It explains the questions to take to your own CPA, so you can plan before the first payment rather than after the first tax season.
Start with the size of what you are planning for. A first-time PLS surrogate carrying one baby receives a typical total package of roughly $68,000 to $78,000, built on $60,000 base compensation (proposed), or $65,000 to $70,000 for an experienced surrogate. Part of that is compensation, part is allowances, and part is repayment of costs you have already paid. Each part may be treated differently, which is why the line items matter.
Which parts of the package are likely taxable and which are not?
The table below shows the treatment tax professionals generally apply. It is a starting point for your conversation with a CPA, not a ruling.
| Line item | Generally accepted treatment | Confirm with CPA |
|---|---|---|
| Base compensation | Generally treated as taxable income | Yes |
| Monthly allowance (no receipts) | Unsettled; often treated as taxable because it is not tied to documented expenses | Yes |
| Medication start and transfer fees | Generally treated like base compensation | Yes |
| Lost wages | Unsettled; replaces wages that would have been taxed | Yes |
| Reimbursements for documented expenses (travel, copays, childcare) | Generally not income, when they repay actual documented costs | Yes |
| Maternity clothing allowance | Depends on whether it is treated as an allowance or a documented reimbursement | Yes |
| Life insurance premiums paid by the intended parents | Unsettled; ask how the policy is owned and paid | Yes |
The pattern behind the table is simple. Money that pays you for your time and risk looks like income. Money that repays a documented cost you already paid generally does not. Allowances sit in between, which is why you should keep receipts even for items that do not require them.
Will you get a 1099?
Maybe. Some escrow agents issue a Form 1099 for surrogate compensation; many do not. It depends on the escrow company the intended parents use, not on PLS.
The absence of a 1099 does not make the income tax-free. You may owe tax whether or not a form is issued. A 1099 is a reporting document, not a decision about whether something is taxable.
What you can do regardless: keep every escrow statement. The independent escrow agent pays you from the account the intended parents funded, and its statements show the date, amount and purpose of every payment. Those statements are what your CPA will need. See the payment schedule for what is paid when, and escrow protection for how the account works.
Should you set money aside and how much?
Yes, set money aside until you have advice. How much is a question for your CPA.
As a precaution, many surrogates set aside 20 to 30 percent of each base compensation installment until a tax professional tells them what they owe. This is a rule of thumb, not advice.
A practical approach:
- Meet a CPA before the first payment. Bring your agreement and the payment schedule.
- Open a separate savings account for the set-aside, so it is not spent by accident.
- Move the set-aside on the day each installment arrives. Base compensation is paid monthly from heartbeat through delivery, so the habit becomes routine quickly.
- Ask about estimated payments. Your CPA may recommend quarterly estimated tax payments rather than one bill in April.
- Keep records together. Escrow statements, receipts, mileage logs and pay records in one folder.
The intended parents do not withhold tax from your compensation. Planning is your responsibility, with your CPA's help.
Does Illinois tax surrogate compensation?
Illinois taxes federally taxable income, so the federal treatment generally carries over to your Illinois return. If your CPA treats base compensation as federal taxable income, expect it to count for Illinois as well.
Illinois law permits compensation for a gestational surrogate. Its tax treatment is unsettled, just as it is federally. If you live in another state, your state's rules apply, and a CPA in your state is the right person to ask.
Can surrogate compensation affect benefits or financial aid?
It can, which is one reason to plan early.
PLS requires that surrogates not receive government assistance at the time they apply. See the government assistance requirement. Even so, a year with surrogate compensation can raise your household income for other purposes. Taxable compensation may count as income on college financial aid applications for you or your children, and on applications for other income-based programs in later years.
Ask your CPA two questions: which tax year each payment falls in, and how that income will appear on any application you expect to file in the next few years. A journey that runs 18 to 24 months can spread payments across two tax years, which may change the answer.
Can intended parents deduct it?
Under current IRS guidance, intended parents cannot deduct surrogate compensation as a medical expense. That rule affects the intended parents' taxes, not yours. It does not change how your compensation is treated.
The intended parents' tax questions are for their own advisor. PLS does not give tax advice to either side, and neither should anyone who is not your own tax professional.
That is the same reason PLS does not employ in-house attorneys, psychologists or escrow staff. Each of those professionals protects someone, and they can only do it if they answer to that person rather than to the agency. A tax answer from the agency that arranges your journey is not independent advice. A CPA you choose, who works for you, is. You decide who to hire, and the advice is yours.
This page was written by Nancy Block, RN, founder of PLS, and is reviewed by counsel and a CPA before publishing. Reviewed by counsel [name] and CPA [name], [date]. For the full package, see surrogate compensation.
Sources
- Internal Revenue Service (IRS). Internal Revenue Code Section 61, gross income defined.
- IRS guidance on deductible medical expenses, as it applies to surrogacy costs.
- Private Label Surrogacy compensation schedule, pending confirmation by Nancy Block, RN.