How can my wife and I keep as much money as possible if her cousin wants her to be a surrogate?

Question

We are elated to help family and get the extra money, but we are wondering how to keep as much of it away from the IRS as possible. 
 
This is not a typical surrogacy. For one, it's family. Secondly, the amount of money my wife will be given will only be $850 a month for 12 months. What can we do to keep as much of this money from the IRS as possible? 
 
My wife's cousin plans on paying for all expenses, including transportation to and from doctor appointments. This is also a one time thing, my wife is not planning on making this a job or anything serious. 
 
Without any expenses I can think of, I'm worried that we'll need to set aside a whopping 15% or so for self employment tax.

James L. Arrasmith · Answer

Since the surrogacy payment is not formal income, there's flexibility in how you handle it. If you can categorize the payments as a "gift" from your wife's cousin, it might not be subject to income tax. The IRS allows individuals to give up to $17,000 per year (as of 2024) to another person without it being taxed as income. 
 
You should keep detailed records of any expenses related to the surrogacy, even if your wife's cousin is covering them. If there are costs that are not directly reimbursed, they could be offset against the payment, potentially reducing any taxable amount. Consider tracking all transportation and medical-related expenses carefully. 
 
The main concern is the self-employment tax, as you mentioned. You might be able to avoid this by structuring the payments as gifts or reimbursements for specific expenses rather than income for services. Always ensure you are documenting everything to support your tax return in case of any inquiries.

Q: How can my wife and I keep as much money as possible if her cousin wants her to be a surrogate?