Egg donors typically receive between $5,000 and $10,000 for an egg donation. And while you may feel that you are being compensated for pain and suffering, or that you are doing a charitable deed, the IRS treats that pay as self employment income.
How do they figure that? Well, for one thing, there’s the 2015 Tax Court case of Perez v. Commissioner of Internal Revenue. In that case, the court ruled that the money paid to Perez was indeed taxable income.
Now the Perez case really only argues whether the money is taxable or not. It doesn’t actually argue the merits of whether it constitutes self-employment income, but much of the language of the case implies that providing eggs and being compensated for it is a service business.
So, if you’re thinking about becoming an egg donor, you need to look at the tax consequences before you put your body through that painful process. Let’s say you’re a first time donor and the fee you should receive is $5,000. Now suppose you’ve got a job already and you’re in the 15% tax bracket. This extra $5,000 will be taxed as self employment income meaning that the 15.3% self employment tax on that income, plus the 15% regular tax on that income. The self employment income is really taxed at 30.3% to you. (And of course, it’s higher if you’re in a higher tax bracket.)
So if you’re getting paid $5,000 for the egg donation, then you’re coming out of the deal with just $3,485. Here’s how the math works on that:
$5,000 times 30.15% tax rate equals $1,515 in taxes
$5,000 minus $1,515 in taxes equals $3,485 to keep
The point here is that you’re not getting that $5,000 free and clear. You’re actually earning less than $3,485 if you add state income taxes to the equation.
So what about the argument that you’re not providing a service, that you’re really selling body parts? Okay, I have to admit here that I have a hard time with that argument. I guess I’m a little old-fashioned. (Excuse me, I can hear my daughter reading this and yelling, “A little old fashioned? How about stone age!”) But perhaps more importantly, it is still illegal to sell body parts in the United States.
But let’s take this argument to the extreme anyway. What if you could sell body parts? How would you value them? I think, I would use the example of livestock. That’s as close as I can come to the body part argument. If you buy an adult cow for $1,000 and later sell it for $2,000, you would pay a capital gains tax on the $1,000 profit from the sale of that cow.
But, if that cow gave birth to a calf while you owned her, and then you sold that calf for $500 – that $500 would be taxed as ordinary income. It would be the sale of inventory that you didn’t pay for so the full $500 would be taxed as ordinary income. And, since selling cattle would be your business – well then you would pay self employment tax on that calf that you sold. I think that egg donation is more like selling the calf–you’re not buying the eggs to re-sell, you’re “manufacturing” then. (You see how I find this a very uncomfortable argument?)
So whether you doing the egg donation as a “service business” or a “sale of property” business – you are still going to be subject to self employment tax on that income. As you make your decision, take into account the taxes you’ll be required to pay and whether or not you’re being compensated fairly for your efforts.