Surrogacy taxes work along one clear line: the surrogate owes federal income tax on what she’s paid, and the intended parents generally cannot deduct what they spend on her. The IRS allows intended parents to deduct fertility treatments performed on their own bodies, but payments toward the surrogate’s compensation, medical care, insurance, and related services are non-deductible personal expenses. On the surrogate’s side, base fees are taxable income, some reimbursements can be excluded if the contract is structured properly, and self-employment tax may apply on top. How each payment is labeled and documented in the surrogacy agreement drives the tax result for both sides.
What Intended Parents Can and Cannot Deduct
Federal law lets you deduct unreimbursed medical expenses above 7.5% of your adjusted gross income, but only for care provided to you, your spouse, or a dependent.1Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses If you have a diagnosed condition like infertility, your own egg retrieval, sperm collection, hormone treatments, and IVF lab work are potentially deductible because they treat your condition and happen to your body.
The deduction ends the moment the medical activity shifts to the surrogate. IRS Publication 502 says it directly: “You can’t include in medical expenses the amounts you pay for the identification, retention, compensation, and medical care of a gestational surrogate because they are paid for an unrelated party who is not you, your spouse, or your dependent.”2Internal Revenue Service. Publication 502 – Medical and Dental Expenses That covers her prenatal visits, hospital delivery, screenings, and pregnancy-related insurance premiums.3Internal Revenue Service. Private Letter Ruling 202114001
A surrogate almost never qualifies as your dependent. The Internal Revenue Code defines a dependent as either a qualifying child or a qualifying relative, and the qualifying relative category requires a specific family relationship or year-round membership in your household as a family member.4Office of the Law Revision Counsel. 26 USC 152 – Dependent Defined A gestational carrier under a surrogacy contract doesn’t fit either.
Legal fees for drafting the surrogacy agreement are also non-deductible. So are agency fees, escrow management costs, and psychological evaluations. The IRS treats these as personal expenses rather than medical care, even though the work is necessary to make the arrangement possible. In practical terms, the only surrogacy-related costs intended parents can potentially deduct are fertility treatments performed directly on their own bodies to treat a diagnosed condition.
The Magdalin Case and What It Actually Bars
The leading case is Magdalin v. Commissioner, a 2008 Tax Court decision that many taxpayers read too broadly. William Magdalin, a single heterosexual male with no diagnosed medical condition, deducted his entire surrogacy expense package. The court denied every deduction, finding no causal relationship between a medical condition and his expenses, and noting the procedures did not affect a structure or function of his own body.
The critical fact was the absence of a diagnosis. Magdalin wasn’t infertile. He chose surrogacy as a reproductive path, not as treatment for a physical problem. An intended parent who does have a diagnosed condition, like blocked fallopian tubes or azoospermia, stands on different factual ground for the treatment costs incurred on their own body. Magdalin bars deductions for procedures on someone else’s body and for costs disconnected from any medical condition of the taxpayer. It doesn’t automatically bar an infertile patient from deducting IVF costs performed on their own body.
The IRS applied the same logic in Private Letter Ruling 202114001, denying a couple’s surrogacy expenses because “the current facts do not identify a medical condition nor do taxpayers allege that expenses are incurred to treat a medical condition.”3Internal Revenue Service. Private Letter Ruling 202114001 Private letter rulings technically bind only the requesting taxpayer, but they reveal how the agency thinks.
FSA, HSA, and the Adoption Credit
Health Savings Accounts and Flexible Spending Accounts follow the same “qualified medical expense” definition, so you cannot use FSA or HSA funds to pay a surrogate’s medical bills, compensation, or related expenses.2Internal Revenue Service. Publication 502 – Medical and Dental Expenses You can use them for your own qualifying fertility treatments. The federal adoption tax credit is also unavailable: the IRS specifically lists expenses from a “surrogate parent arrangement” as ineligible.5Internal Revenue Service. Adoption Credit Surrogacy is not adoption in the tax code, even if the intended parents later complete a legal adoption of the child.
How the Surrogate’s Compensation Is Taxed
Federal law defines gross income as “all income from whatever source derived,” and compensation for services heads the list.6Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined A surrogate providing gestational services under a contract is earning compensation. Base fees typically run from $30,000 to $60,000, and every dollar is taxable income.
Some try to characterize part of the compensation as a gift from the intended parents. That argument rarely holds. The IRS looks at substance over labels, and money changing hands under a contract that specifies services, timelines, and obligations has the hallmarks of income. The contract itself is essentially a record that the payment is for services rendered. Trying this classification creates audit risk with little upside.
Reimbursements That May Be Excluded
Not every dollar the surrogate receives is taxable. Reimbursements for actual out-of-pocket expenses can be excluded from gross income if they’re structured along accountable-plan lines, which requires a connection to a legitimate expense, substantiation with receipts, and a requirement to return excess amounts.7Internal Revenue Service. Revenue Ruling 2003-106
In practice, the contract should designate specific payments as reimbursements for identified expense categories: maternity clothing, mileage to appointments, specialized nutrition. The surrogate submits receipts to the intended parents or escrow agency within a reasonable time, generally 60 days. If receipts show $1,200 spent and the contract reimburses $1,200, that amount can be excluded from taxable income.
Structure controls the result. A flat monthly allowance with no documentation requirement is almost certainly taxable, even if the contract calls it a “reimbursement.” When the surrogate keeps whatever she doesn’t spend, there’s no meaningful difference between the payment and compensation, and the contract label won’t save it at audit.
Insurance Premiums and Lost Wages
If the intended parents pay a health insurer directly for a policy covering the surrogate’s pregnancy, and the surrogate never touches the money, she generally has no income to report from those premiums. If instead they reimburse her for premiums she paid, the accountable-plan principles apply and she needs documentation.
Payments compensating the surrogate for lost wages during bed rest or recovery are taxable income because they replace earnings she would otherwise have received.
Self-Employment Tax
Whether the surrogate owes self-employment tax on top of income tax turns on whether her surrogacy work rises to the level of a trade or business. A surrogate who has carried before or plans to again is more likely to be classified as running a business, which means reporting on Schedule C and owing 15.3% self-employment tax on net earnings: 12.4% for Social Security on earnings up to $184,500 in 2026, plus 2.9% for Medicare with no cap.8Social Security Administration. Contribution and Benefit Base The filing requirement kicks in at $400 of net earnings.9Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
A first-time surrogate with no plans to carry again has a reasonable argument that her surrogacy was a one-time activity rather than a business, reporting the income on Schedule 1 as other income and avoiding self-employment tax. The Schedule C instructions define a business as an activity pursued “for income or profit” with “continuity and regularity,” and note that “a sporadic activity” doesn’t qualify.10Internal Revenue Service. Instructions for Schedule C (Form 1040) The IRS hasn’t issued definitive guidance, so the classification depends on the facts. On a $45,000 base fee, self-employment tax alone would add roughly $6,900, so the position is worth thinking through with a tax professional.
Estimated Tax Payments
No tax is withheld from surrogacy compensation, so the surrogate has to pay throughout the year. The IRS expects quarterly estimated payments if you’ll owe $1,000 or more after subtracting withholding and refundable credits.11Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax Base compensation between $30,000 and $60,000 will easily cross that threshold.
To avoid the underpayment penalty, pay at least 90% of the current year’s tax liability through estimated payments, or 100% of the prior year’s tax, whichever is smaller. Surrogates who receive uneven payments during the pregnancy can use the annualized installment method to adjust the timing.
Where Each Party Reports Surrogacy Items
Intended parents with deductible fertility treatment costs from procedures on their own bodies claim them on Schedule A of Form 1040 as medical expenses.2Internal Revenue Service. Publication 502 – Medical and Dental Expenses Only the portion above 7.5% of adjusted gross income is deductible, and itemizing only helps if total itemized deductions exceed the standard deduction, which for 2026 is $16,100 for single filers and $32,200 for married couples filing jointly.12Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 For many intended parents, their deductible fertility costs won’t clear both hurdles.
One recurring misconception is that intended parents must issue Form 1099-NEC to the surrogate. The form’s instructions require reporting only for payments “made in the course of your trade or business” and state that “personal payments are not reportable.”13Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC An individual or couple paying a surrogate to carry their child is not operating a business, so a 1099-NEC is generally not required. A surrogacy agency paying the surrogate as part of its operations is a business and may have reporting obligations. Whether or not a 1099 is issued, the surrogate still owes tax on the income.
For the surrogate, the reporting form depends on the business-versus-sporadic question. A repeat surrogate reporting as a business uses Schedule C, which also permits deductions for ordinary and necessary business expenses like phone bills, mileage to agency meetings, and professional fees. A first-time surrogate reporting the fee as other income uses Schedule 1, Line 8z. Either way, the total taxable compensation gets reported even if no 1099 was received. The IRS matches income against its own records, and payments flowing through escrow leave a clear paper trail. If self-employment tax applies, Schedule SE goes alongside Schedule C, and the deductible half of self-employment tax lands on Schedule 1 as an adjustment to income.
Documentation and Common Mistakes
The surrogacy contract is the foundation of every tax position both sides take. It determines which payments are compensation, which are reimbursements, and which are direct payments to third parties. Both intended parents and surrogates should keep it accessible along with a detailed ledger matching every payment to a specific contract provision. For intended parents, that means separating fertility treatment invoices from payments toward the surrogate’s care. For surrogates, it means keeping every receipt for reimbursable expenses organized by category and date, with a record of when each was submitted. The 60-day substantiation window is real, so date-stamping submissions is worth the effort.
The most expensive error surrogates make is not reporting the compensation at all. Some circulate the idea that if no 1099 arrives, the income doesn’t need to be reported. That’s wrong. The obligation to report income exists whether or not a tax form is issued. When the IRS matches escrow disbursements against an unfiled return, the result is back taxes, interest, and potentially a 20% accuracy-related penalty.14Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
For intended parents, the most common mistake is deducting the surrogate’s medical bills as if they were the parents’ own medical expenses. The IRS has been consistent across rulings, publications, and case law: if the procedure happens to the surrogate’s body, it’s not your medical expense. Mixing deductible personal fertility costs with non-deductible surrogate costs on the same Schedule A is the fastest way to draw scrutiny.
Both sides frequently stumble on reimbursements. A contract that labels everything as a “reimbursement” but doesn’t require receipts, doesn’t impose a return-of-excess obligation, and pays the same amount regardless of actual spending isn’t an accountable arrangement. The IRS will reclassify those payments as taxable compensation. Getting the structure right at the contract stage, before money changes hands, is far simpler than trying to fix it at tax time.