Paying taxes on raffle winnings
Raffles or drawings can accomplish fundraising goals for a tax-exempt organization while also providing entertainment for the organization and participants. But these fundraising events require a bit of tax planning to keep IRS issues at bay (and note that separate laws apply to state-level and federal income tax exemptions).
The IRS views raffles and drawings similarly to lotteries: participants pay for the chance to win prizes, and the host typically determines winners by drawing tickets at random.
When hosting a raffle or drawing, tax-exempt organizations may need to:
- Obtain information about the prize winners
- Report prizes to the IRS
- Notify the winners of this reporting
- Withhold federal income tax on the prizes
Obtaining Prize Winners’ Information
Tax-exempt organizations that host raffles must ensure that all prize winners report their identities—under penalty of perjury—using IRS Form 5754 . The organization must retain this form for four years and make it available for the IRS to inspect. The organization may also use information in the form to meet additional reporting requirements by the organization itself.
IRS Reporting Requirements; Notice to Winners
Generally, tax-exempt raffle hosts must report prizes from raffles or drawings if two tests are met:
- The amount paid to the winner is $600 or more, and.
- The payout is at least 300 times the cost to enter the drawing.
In applying the first test, organizations can subtract the cost of entering the drawing from the prize value; in other words, they can consider the net amount of the prize rather than the gross amount.
For example, assume someone purchases a $1 ticket for a raffle conducted by an exempt organization and wins $700. This prize meets both tests described above, even if the organization subtracts the ticket cost from the prize, so the exempt organization must report it to the IRS.
Exempt organizations use Form W-2G to report qualifying raffle prizes (those meeting both tests). This form also requires information about the prize winners’ identities contained in Form 5754. It is due to the IRS by the last day of February in the year after the raffle is held. Organizations must also send a copy of Form W-2G to the prize winners by January 31 of the year after the raffle is held.
If a net prize (after subtracting the ticket cost) exceeds $5,000, the organization hosting the raffle must withhold 25 percent from the prize and report this amount to the IRS on Form W-2G—the same form used to report raffle prizes generally. An organization that fails to withhold 25 percent from the prize is subject to a withholding tax.
To illustrate, again assume that someone purchases a $10 ticket for a raffle conducted by an exempt organization, but this time wins $6,000. Because the net prize exceeds $5,000, the organization must withhold 25 percent from the net winnings (the $6,000 award minus the $10 ticket cost), or $1,497.50.
An organization may need to withhold an extra three percent (“backup withholding”) for a total of 28 percent withholdings if:
- The prize meets the two reporting tests discussed above, or.
- The prize winner fails to provide a correct taxpayer identification number (social security number, individual taxpayer identification number, or employer identification number).
For non-cash prizes, the situation is more complicated. The winner must pay the organization 25 percent of the fair market value of the prize, after subtracting the ticket cost. Assume again that someone purchases a $10 raffle ticket, but instead of winning cash, the person wins a car worth $6,000. Since the value of the prize exceeds $5,000, the withholding requirement applies. The winner must pay 25 percent of the net prize amount, or $1,497.50, to the organization. The organization must then remit that amount to the IRS on the winner’s behalf, using Form 945 (for reporting income tax withheld the prior year on all non-payroll items). The form is due annually by January 31 of the year after the taxes are withheld.
To keep non-cash-prize winners happy, an organization may pay the withholding tax instead of requiring winners to part with additional funds. Under this approach, the withholding amount is added to the value of the prize. Here’s the catch: if the host covers the tax liability, the IRS requires a higher withholding tax rate of 33.33 percent. In other words, if the organization agreed to pay the withholding tax for the $10 ticket winner of a non-cash prize worth $6,000, the withholding tax would be 33.33 percent of $5,990, or $1,996.47, and the gross reportable winnings would be the value of the prize plus the amount paid in withholdings, or $7,996.47.
In sum, while hosting a raffle or drawing may be a great way to earn extra revenue and build camaraderie among donors, tax-exempt entities must conduct these activities with care and remain diligent in complying with the tax reporting and withholding requirements.
DISCLAIMER: The materials presented here are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.
Understand how to comply with the tax-reporting and withholding laws that apply to your organization if you host a raffle or drawing.
Pay taxes on church raffle prize winnings
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- Jan. 7, 2014 /
- 2 min read
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Dear Tax Talk,
I won $3,000 in a church raffle. I gave $1,000 from the prize money as a donation to the church, and I deposited the balance of $2,000 in my bank account. Are the winnings considered income that requires me to pay tax? Also, since I took $1,000 of the $3,000 and donated it to the church, am I only liable for the $2,000 that I actually put in my bank account? Must I get a 1099-R Form from the church to file with my 1040 tax forms when I file my income tax forms for 2013?
More On Gambling Winnings:
- Reporting gambling winnings
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- IRS Form W-2G
Congratulations; it is always exciting to win! Raffles are often used by many churches and schools as a fundraising source, and I am sure the church was very grateful for your generosity in sharing the winnings. According to the IRS, “in general, a raffle is considered a form of lottery. As such, a raffle generally refers to a method for the distribution of prizes among persons who have paid for a chance to win such prizes, usually determined by the numbers, or symbols, on tickets drawn.”
You are going to need to report the $3,000 in winnings as income on line 21 of your Form 1040, which is for “other income.” If the church is a qualified tax-exempt organization and you itemize your deductions, you can claim the charitable contribution of $1,000 made to the church. Additionally, since gambling losses are deductible to the extent of gambling winnings as a miscellaneous itemized deduction on Schedule A, line 28, you can deduct the cost of the ticket(s) along with any other lottery losses — again, that’s if you itemize your deductions on Schedule A.
You will not be receiving a Form 1099-R from the church for your winnings, as that is not the required form. Instead, you may be issued Form W-2G, which is used to report certain gambling winnings. Generally, an exempt organization such as a church is required to report raffle prizes on Form W-2G if the prize amount is more than $600 and at least 300 times the cost of the raffle ticket.
Since the church is a tax-exempt organization and your gift is more than $250, you will need to obtain written acknowledgment indicating the amount of your cash contribution. The acknowledgment must also say whether any goods and services were provided by the organization in exchange for the gift, as well as give a description and a good faith estimate of the values of those goods and services.
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To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
About the author
Judy O’Connor has been a practicing CPA for more than 25 years in the South Florida community and assists her diverse client base in all aspects of tax compliance at a local, state and federal level. Her clients consist of individuals, corporations, limited liability companies, partnerships and estates. Prior to being in private practice, she worked for five years in the tax department of KPMG’s Miami office. Her focus at KPMG was on resolving Internal Revenue Service matters for clients and assisting on Florida state tax issues on a firm-wide basis. She began her tax career working for the IRS as a revenue agent in South Florida, where she worked in the special enforcement program. She graduated from Florida State University with bachelor’s degrees in accounting and finance. Upon graduation, she worked for FSU in the controller’s office as an accountant.
You will owe income taxes on your church raffle prize winnings, but you can deduct your donation if you itemize.