Surrogacy contracts inconsistently use gross versus net lost wages for reimbursement during bed rest. This article suggests using gross lost wages, like how gross income is used in some child support calculations, to ensure fairness and transparency. By doing so, attorneys can protect the surrogate from potential financial pitfalls, such as IRS audits, while maintaining fairness in the agreement.
Most surrogacy contracts overlook the necessity of defining gross lost wages, but it’s crucial for clarity. In Nevada, the state formed a child support commission to update statutes that hadn’t changed since the 1980s. Previously, gross income was broadly defined as all monthly income from any source, sparking debates on what it encompassed. Through extensive discussions, the commission determined that gross income included 14 items and excluded seven others. Merely stating “income from any source” proved insufficient.
Why does the definition of gross income matter in a surrogacy contract? Whether a contract bases reimbursement on gross or net income, it’s crucial to first determine a fair gross income for the surrogate to be reimbursed. One of the fairness issues for surrogacy is whether to include overtime in reimbursement. Most contracts exclude it.
Let’s discuss overtime in surrogacy contracts. Some contracts don’t address overtime reimbursement, while others specifically exclude it. For many surrogates, overtime isn’t regular; they might only work a few extra hours now and then. While it may seem fair to overlook this, what if the surrogate depends on overtime to meet her financial needs? Is it still fair then? The Nevada child support commission faced a similar question when determining fair child support. They concluded that if overtime pay is significant, consistent, and accurately recorded, it should be included in gross income. These criteria—significant, consistent, and accurately tracked—are crucial and can be applied to surrogates who rely on overtime.
If you use net lost wages in your contract, you need to determine which deductions should be subtracted to ensure fairness and transparency in the reimbursement calculation. Gross lost wages provide consistency and predictability because there aren’t deductions to sift through. In the realm of child support, there’s a distinction between mandatory and discretionary deductions, terms that should also be considered in surrogacy contracts.
Mandatory deductions, such as taxes, Social Security, and Medicare contributions, are legally required and must be subtracted from gross income to determine net income. These deductions are nonnegotiable by the employee.
On the other hand, discretionary deductions are optional and based on personal preferences. If a surrogate didn’t opt for these deductions, she would have received the income directly. When she doesn’t work and these discretionary deductions aren’t paid, it’s unfair to the surrogate, as she loses the benefit due to the surrogacy contract. This unjustly reduces her income.
If you are using net lost wages in your contract, you must check your definitions to ensure that it is clear what deductions will be reduced to determine the net lost wages.
Two main arguments are often used to justify why a carrier should only receive her net lost wages, but both are flawed.
The first argument suggests that the payment should resemble a form of pain and suffering compensation, akin to how personal injury awards are treated by the IRS. The Internal Revenue Code defines gross income broadly to include all income from any source. The definition of gross income has an exception: it doesn’t cover any damages received on account of personal physical injuries or physical sickness whether from a lawsuit or stipulation. IRC § 104(a)(2). Treas. Reg. § 1.104-1(c) states that “[t]he term ‘damages received (whether by suit or agreement)’ means an amount received . . . through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered in lieu of such prosecution.” There isn’t a prosecution, a tort, or legal suit in a surrogacy. Even if a tort could be implied, that analysis is misplaced when it comes to lost wages reimbursement that intentionally reimburses “wages” versus the base support that perhaps can be looked at as the damages.
The second argument suggests that if the carrier doesn’t report the income from surrogacy, she won’t pay taxes, leading to unfair enrichment. Yet, all income is generally subject to taxation, regardless of whether it’s reported.
The IRS has given guidance regarding compensation from egg donations, but there’s no specific guidance on surrogacy compensation. If an egg donor receives reimbursement solely for essential expenses, such as travel or medical costs, this income is typically not taxable, if it’s properly documented. However, if the compensation extends beyond reimbursing expenses and includes payment for lost wages, it’s considered taxable income. Similarly, surrogates should follow this approach for reimbursement of necessary expenses. However, the focus here is on “lost wages”—not base compensation or reimbursable expenses—it’s pure reimbursement for the time lost from work. At the heart of the IRS lies a fundamental principle: if you work, you pay.
While I haven’t personally encountered a surrogate who underwent an audit, other attorneys have shared instances of surrogates being audited. In such cases, they had to pay taxes on the portion of the compensation received designated as base support and lost wages, but not on reimbursement for other incurred expenses.
This raises questions about our professional responsibility. As family law attorneys, we refrain from giving tax advice. Consequently, we neither advise them to report their income nor advise against it. However, we deduct taxes from their compensation that is not given to the IRS. Surrogates are left in jeopardy of an audit. If they are audited, they’re faced with the burden of possibly paying double taxes on the lost wages’ reimbursement. Meanwhile, the intended parents enjoy the advantage of not having to pay these taxes. This begs the question: who should benefit from this advantage, the intended parents, or the surrogate? By opting for net wages, each of us essentially decides that the intended parents should benefit.
In summary, opting for gross lost wages instead of net wages brings several benefits to reimbursement calculations, such as fairness, transparency, and consistency. By borrowing insights from child support laws that emphasize gross income, lawyers can ensure a more fair resolution of lost wages disagreements, reducing the risk of exploitation. Prioritizing gross lost wages aligns with principles of fairness and justice, benefiting all parties involved in the legal process.
