Prizes, Awards and Gifts
What you Need to Know
The Internal Revenue Code states that under certain circumstances the value of prizes and awards/gifts to individuals is considered taxable income. Merchandise or products won as a prize or award will be considered at the fair market value and could also be considered taxable income. Nonresident aliens may be subject to additional tax rules regardless of amount, depending on circumstances and treaty status.
IRS regulations stipulate that for employees who receive any gift of cash, gift card, gift certificate or cash equivalent, (an item that is easily converted into cash) for reasons related to their employment, such as employee appreciation, service awards, etc., it must be included in the recipient’s gross income since it is considered extra salary or wages, regardless of amount awarded or won. This would also pertain to a tangible award/gift as well, such as a computer, bike, DVD player, etc. The fair market value of that gift would be included in the employee’s gross income as well and reported on their W2 form.
If an employee wins a prize or award/gift that is for a reason other than related to employment and the contest, program or raffle is open to the general public, then the prize and award/gift amount will be treated as 1099 income. The recipient will receive a Form 1099-MISC from UNCW on any winnings totaling over $600.00 in a calendar year. The recipient will also be required to provide UNCW with a completed W-9 form, which includes social security number, to be used for issuing a 1099 for tax purposes, as well as signing a prize/award acceptance form.
Tax Compliance information
Calculating taxes on raffle prize winnings
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- Oct. 21, 2014 /
- 3 min read
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Dear Tax Talk,
A nonprofit — let’s call it “X” — has a raffle with $125 tickets and a $5,000 first prize. As I understand the taxes, the first prize win is much less than the 300 percent required for X to report it to the IRS. The win minus the ticket is only $4,875, so it is less than the amount X would need to withhold anything for the IRS. So the organization doesn’t have to do anything with the IRS in regard to the winnings.
I volunteer for the organization and am expected to sell at least three tickets. However, I don’t know anyone who could afford to pay $125 for a raffle ticket. So I am going to have to sell parts of the ticket. If I sell 12 people $10 pieces and I pitch in $5, then I have $125 to give X. I would give each of the 12 people a document with the number of the ticket on it and a statement saying that they get 8 percent of the prize if that ticket wins. That way, I could sell $10 chances to 36 people and pitch in $15 of my own to cover my whole obligation to X.
If one of the three tickets wins first prize, then I pay each of the 12 people with that number $400 and I keep $200 for myself.
How do I figure taxes on raffle prize winnings? Do I just put $200 on the line “other income”? Do I just ignore the other people I paid, since their taxes are their business?
You are correct that the exempt organization is not required to report the $5,000 raffle prize winnings. This is because they do not meet the dual requirement of the prize being $600 or more and the payout being at least 300 times the amount of the ticket. If your share of the winnings is $200, then that is the amount you will include on your tax return as “other income.” The other people are responsible for reporting their own winnings.
The IRS considers raffles to be a form of lottery and if the requirements listed above had been met, the organization would have had to complete Form W-2G, Certain Gambling Winnings, to report the earnings. If that had been required and you had a group of individuals that shared in the winnings, then you would have had to complete IRS Form 5754, Statement by Person(s) Receiving Gambling Winnings, which includes the name, address, Social Security number and amount of winnings paid to each person. This is what happens when you hear on the news that a group of employees has won a large amount of lottery money.
One final note: You should keep in mind that you can deduct the cost of the raffle tickets up to the amount of your winnings on line 28 of Schedule A, Itemized Deductions.
Thanks for the great question and good luck on your ticket sales.
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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.
Did you enter a raffle? Learn how to report the taxes to the IRS. In short, if the nonprofit organization doing the raffle doesn't meet IRS criteria for reporting winnings, it's pretty easy.