And the Winner Is… The IRS?

Oct 17, 2013

Winning anything, especially a prize, is always fun and makes us feel like we’re on top of the world. But something that can quickly bring a winner down to earth is the realization that they’ve just increased their tax liability with the win. Winnings are considered income by the IRS. Most of the time this just reduces the amount of a cash prize, but with non-cash prizes this can mean money out of the winner’s pocket.

For sweepstakes and raffles, a winning payout that is both over $600 and at least 300 times the wager must be reported to the IRS by the paying organization. This includes church raffles, charities, and other tax-exempt organizations. In addition, the organization must withhold the tax if the win is over $5,000.

Tickets to the Super Bowl are one of the most popular sweepstakes prizes. But if the tickets themselves (or tickets and travel) are the only prize, it might end up costing the winner more than they think. One of the indirect costs of winning includes creation of a tax liability. Non-cash prizes are subject to ordinary income tax rates and require an up-front withholding of 25% of their fair market value. This means that if a prize includes tickets, airfare, and accommodations valued at a total of $2,000; the winner will have to pay $500 in taxes up-front, out of their own pocket. And this is just the federal tax. Many states (including Ohio) and local governments will also collect tax on winnings.

Now lets not forget that winning is inherently a good thing, it just might not be as good as we originally think. If you’ve got a friend that wins a raffle or sweepstakes, there’s nothing wrong with letting them feel like a the million bucks for awhile before pulling them a little back down to earth by reminding them they now owe tax on the prize.

By: Anthony Mifsud, Staff Accountant

Categories: Uncategorized