Don’t overlook the post-raffle details …
Sometimes it comes as a surprise to raffle organizers that the prize their organization is offering may be subject to federal (and possibly state and local) income taxes. The formula for calculating the amount of tax to pay, if any, may seem complicated, but it’s actually pretty straightforward.
First of all, determine whether your organization needs to report the raffle prize to the IRS. In general, if the amount paid for the prize minus the cost of the wager equals $600 or more, and the payout is at least 300 times the amount of the wager, the prize must be reported.
As an example, let’s say Jimmy bought a $1 ticket for a raffle conducted by an exempt organization called XYZ and won $1,000. Simple math tells us that $1,000 minus $1 equals $999 – which is greater than $600 – and that the $1,000 payout is more than 300 times the cost of the $1 ticket. XYZ will need to file Form W-2G with the IRS and give Jimmy a copy of Form W2-G as well.
Jimmy will need to fill out some paperwork, too – Form 5754. This Statement by Person(s) Receiving Gambling Winnings form states his identity and that of anyone else who is entitled to the winnings, and XYZ must keep the form for four years and have it available for inspection.
(If Jimmy receives the winnings but is not the actual winner – or if he is a member of a group of winners who won with a single ticket – as the recipient he must still furnish XYZ the information listed in Form 5754. XYZ will file Form W2-G based on the information Jimmy provides in Form 5754.)
The deadline for issuing Form W2-G to prize recipients is January 31 of the year after the year of the raffle; the deadline for filing Form W2-G is the last day of February of the year after the year of the raffle. So if Jimmy won his $1,000 prize on May 8, 2012, XYZ must issue Form W2-G by January 31, 2013 and file it by February 28, 2013.
If the winnings from a drawing exceed $5,000, the organization paying out the prize must withhold 25% from the winnings and report that amount on Form W2-G. So let’s say Alice bought a $1 ticket at an XYZ raffle and won a prize of $6,000. Subtracting $1 from $6,000 results in $5,999, and so 25% of $5,999 – $1,499.75 – must be withheld from her winnings.
The kicker? If XYZ fails to withhold that $1,499.75 before distributing the prize, XYZ will be held liable for the withholding tax.
Next time, we’ll look at backup withholding and what to do when the prize isn’t cash or if the organization pays the tax as part of the prize.