Should I report money received from being a surrogate? Or is this exempt?

[Barbiedoll]

Want to know what do I do with earnings I received from being a surrogate.

[Patrice]

It depends on the agreement that you made.  Each contract is different, and each state a little different on how compensation is worded for the purpose of determining surrogacy taxes.  The fact is, compensation for gestational surrogacy is not a purchase of a body part, or of a child. It is the purchase of services, performed within the scope of a binding contract. Income received from gestational surrogacy contracts is now officially, and very clearly, taxable – as a part of the service provider's “gross income.”

Basically, if your compensation is considered income, then yes, a surrogate mother will be required to pay income taxes both on a federal and state level.

But, if a surrogate’s compensation is not considered income, it is not taxed, and you will not need to pay income taxes to the federal or state government.

If you income is considered taxable then you would report the income as self-employment income on a Schedule C. You can find the Schedule C in TurboTax Self-Employed (online) https://turbotax.intuit.com/personal-taxes/online/self-employed.jsp or TurboTax Home & Business (desktop) https://turbotax.intuit.com/personal-taxes/cd-download/home-and-business.jsp

[ocsweettheart]

How do you know if your compensation is considered income?

[SweetieJean]

If this is just a one-time thing, and you are not in the trade or business (which requires regularity and a profit-seeking motive) of being a surrogate, you do not report income or expenses on Schedule C.  The only expenses you can take are your out of pocket medical expenses on Schedule A of Form 1040, subject to the regular rules, requiring you to itemize and there is a 10% adjusted gross income floor (2017) to taking medical expenses. The income would be reported on line 21 of Form 1040 as “other income.”

 If you are in the trade or business of being a surrogate because you engage in the activity with continuity and regularity for a profit, your income and related expenses goes on Schedule C. The net income is subject to self-employment tax.

[al1168]

This is considered non-taxable compensation for “pain and suffering” similar to that of being compensated for personal injury car accident claims. No, you do not usually have to claim this as income unless you 1) want to for financial income reporting purposes or 2) need to for requirements in your state. In those cases you’d want to file as self employment income and yes, you’d need to pay taxes on it in order to do that. This is not generally recommended since you won’t be a regular “surrogate” as self employment would imply. There are considerable risks to pregnancy as a surrogate  which is why it is considered a pain and suffering reimbursement. 

[Rae2017]

This is not accurate. In Perez vs Commissioner (2015) the tax courts determined that the risk of "pain and suffering" agreed to in a contract doesn't exempt the compensation received from being taxable income. 

"We conclude by noting that the result we reach today by taking a close look at the language and history of section 104 [pg. 63] is also a reasonable one. We see no limit on the mischief that ruling in Perez's favor might cause: A professional boxer could argue that some part of the payments he received for his latest fight is excludable because they are payments for his bruises, cuts, and nosebleeds. A hockey player could argue that a portion of his million-dollar salary is allocable to the chipped teeth he invariably suffers during his career. And the same would go for the brain injuries suffered by football players and the less-noticed bodily damage daily endured by working men and women on farms and ranches, in mines, or on fishing boats. We don't doubt that some portion of the compensation paid all these people reflects the risk that they will feel pain and suffering, but it's a risk of pain and suffering that they agree to before they begin their work. And that makes it taxable compensation and not excludable damages."