Reporting surrogate-parent payments

Dear Tax Talk,
My husband and I are working with a surrogate mother to carry our child for us. We are paying compensation and some expenses to her. She has asked us not to give her a 1099. We consider her an independent contractor, but we are individuals, not a business. What should we do? -- Kelly

Dear Kelly,
Fortunately, tax compliance is something you teach and not something in the genes.

Form 1099-Misc is used by a business to report payments made in any year to individuals if they total more than $600. It's similar to an employer giving a Form W-2 to an employee, except generally no taxes are withheld on a 1099. The recipient is generally referred to as an independent contractor.

I don't believe the term independent contractor has ever been used to refer to a surrogate mother. In any case, individuals are not responsible for issuing Form 1099 in transactions that are not business related. For example, suppose you were a self-employed physician operating as a sole proprietorship. The payment to the surrogate mother falls outside the scope of the business so you would not be responsible for issuing a 1099 to her.

If you used an attorney to arrange the surrogacy, and the attorney paid the fee to the biological mom, then he might have a responsibility to report the payment. In that case, the attorney might be her independent contractor and the child would be the codependent.