In the United States, surrogate mothers receive fees of about $20,000 to $25,000 for their services. In Canada, the U.K., Australia and a number of other countries, commercial surrogacy is outlawed, but surrogates are compensated for expenses, for example, clothing, food, prenatal vitamins, childcare, travel costs, lost wages, medications, medical bills, etc. In the U.K., reported expenses range from £4,500 (in an arrangement that went awry) to £7,000-£15,000.
Compensation for expenses is not taxable income, but commercial fees are. There are, therefore, tax advantages to structuring a contract as "expenses" not "income."
The tax advantages arise because altruistic surrogates are compensated for expenses, such as lost wages or food, that would not be deductible for income taxes purposes. (Though surrogates might be able to claim food costs under Canada's "food as fuel" ruling.)
For example, imagine a surrogate receiving $15,000 as compensation for expenses. If this was structured as a commercial contract, she might have, say, $10,000 of allowable expenses, giving her $5,000 in net income. If she fits the typical surrogate profile (modest income, married, two children), she will face an effective marginal tax rate of 40% or more, stemming from income taxes (20%), Canada/Quebec Pension Plan premiums on self-employment income (10%), and loss of child tax benefits and sales tax credits (10%). Structuring the contract as "expenses" rather than a "fee" saves her approximately $2,000 (40% of $5,000).
Legal scholar Bridget Crawford has an interesting forthcoming paper on the tax treatment of surrogacy contracts in the US. She argues that, based on other legal precedents, surrogacy fees should be considered taxable income. Yet the limited evidence she could find suggests that most surrogacy agencies do not issue surrogates with tax forms (Form 1099, the US equivalent of a T4A), and most surrogates do not report their fees as taxable income:
I do feel I shouldn’t have to pay taxes for being compensated for helping a couple have a baby. What about all the needles, sticks, stretch marks and pain/suffering I went through?
Even when commercial surrogacy is allowed, surrogates and agencies treat the arrangement as an altruistic one for income tax purposes.
It is odd. The restrictions that we, as a society, place on surrogacy, reflect our deep-rooted discomfort with the practice. There are good reasons for that discomfort.
So why do we force surrogacy contracts to be structured in a way that, by exempting payments from taxation, effectively subsidizes the practice?
Bridget Crawford's paper is forthcoming in the book Challenging Gender Inequality in Fiscal Policy Making: Comparative Research on Taxation, edited by Åsa Gunnarsonn, Lisa Philipps, Kimberley Brooks, and Maria Wersig.