Q: We are doing our surrogacy independently and I would like to know if I should issue a 1099 to my surrogate? Jen K.
A: Hi Jen and thank you for the question.
This is a complex and controversial issue for both parties involved. If you google issues on this topic you will find message boards with some angry surrogates being issued 1099s, while others never receive them. Surrogacy law is still unclear but Egg Donation has been clearly defined.
Egg Donation compensation is completely taxable. Even if the contract says the compensation is for pain and suffering, it is still taxable according to the IRS. The process is compared to a boxer being paid for their pain and suffering. The boxer elects to enter the fight and pain is expected during the process.
While Surrogacy has not been directly ruled on, I expect it to follow the same path as Egg Donation. My opinion is, if compensation is taxable for the surrogate, the intended parents should be able to take a deduction on their personal tax return.
Issuing a 1099 is not complicated. Many companies offer services or software to guide you through the process. A simple google search will yield many results. There could also be an opportunity for the 1099 to be included in your tax preparer service package.
Should you consider issuing a 1099? The simple answer is yes. There is a possible tax benefit to doing so and it may be required, depending on the interpretation of compensation tax law.
The complex answer is maybe.
Here is a short list of items that can dramatically affect the decision to issue a 1099.
- Is there a tax benefit? A taxpayer might not qualify for the deduction and it will not make sense to go through the 1099 process. The medical deduction can be hard to navigate and understand. A tax professional should be hired to examine the possible benefit.
- How is the surrogate going to respond to receiving a 1099? This is a controversial topic and will have serious tax implications for the surrogate. Some surrogates will not work with parents or agencies that issue 1099s. This could be a deal breaker with your match. Is the tax benefit worth losing a surrogate over?
- You and the surrogate should discuss this prior to the contracts being signed. We have seen this come up toward the end of the pregnancy and it has caused tension between the two parties.
- Consider adding the topic of 1099s to the surrogacy contract. Having things spelled out for both parties will reduce any tension or anger for the parties involved.
The most important part of this process is clear communication between you and the surrogate. If everyone is clear about expectations from the beginning, the 1099 should not be an issue. The tide is starting to change as more agencies are issuing 1099s. They will become an industry norm within the next few years as the IRS will give more guidance on the topic. For right now, 1099s appear to be an option for most cases.
—Edward Brockschmidt, CPA & Co-Founder of SeedTrust Escrow
Every Friday, CPA and Co-Founder of SeedTrust, Edward Brockschimdt, will focus on “financial fitness” by answering the most commonly asked financial and tax questions relating to surrogacy and egg-donation.
If you have a question that you would like answered, please comment or drop us a line at [email protected] and we may answer your question in the upcoming weeks.
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