Tag Archives: tax reporting

Prizes, winnings and taxes – Part 2

How to figure the fair market value for tax reporting

Calculating tax on prize winnings

Raffle winnings need to be run through a formula to determine the amount of tax owed.

Last time, we looked at how to determine whether a raffle prize must be reported to the IRS. Now let’s look at some of the perhaps lesser-known or less-understood aspects of income tax law as it relates to raffles.

Backup withholding applies to raffle prizes, to the tune of 28% of the total proceeds, if the prize is otherwise subject to reporting (that is, the amount of the prize minus the amount wagered is $600 or more and 300 times the amount of the wager) and the winner doesn’t provide a correct taxpayer identification number (TIN) – a Social Security number, an individual taxpayer identification number or an employer identification number (EIN).

The rules are a little different for noncash prizes: the winner must pay the organization 25% of the fair market value of the prize minus the wager cost.

For example, let’s say Emma purchased a $1 ticket for a raffle conducted by an exempt organization called ABC. On March 28, 2012, Emma won a drawing for a car with a fair market value of $20,000. Because the prize exceeds $5,000 and the fair market value of the car is $20,000, the tax on the fair market value of the prize is $4,999.75 [($20,000 minus the $1 ticket cost) x 25%)]. Emma must pay $4,999.75 to ABC, which will in turn remit this amount to the IRS on Emma’s behalf.

To remit this tax, ABC will need to indicate the car’s fair market value ($20,000) in box 1 and the amount of the withholding tax paid ($4,999.75) in box 2 on Form W-2G.

What if the organization pays the withholding tax as part of the prize? In such a circumstance, the organization must pay tax not only on the fair market value of the prize less the wager, but also on the taxes it pays on behalf of the winner. This requires the use of an algebraic formula.

To do this, the organization must pay a withholding tax of 33.33% of the prize’s fair market value and report the grossed-up prize amount – the fair market value of the prize plus the amount of taxes paid on behalf of winner – in box1of Form W-2G and the withholding tax inbox2.

If ABC pays the withholding tax on Emma’s behalf, the withholding tax is $6,665.67 [($20,000 fair market value of prize minus the $1 ticket cost) x 33.33%]. ABC must report $26,666 as the grossed-up prize winnings inbox1of Form W-2G, and $6,665.67 withholding tax inbox2.

To report and send withheld tax to the IRS, the organization must send in Form 945 by Jan. 31 of the year following the year in which taxes were withheld (be sure to mark the Form 945 checkbox on Form 8109, the federal tax deposit coupon!) and list its EIN on Forms W-2G, 1096 and 945. Don’t have one? Use Form SS-4, Application for Employer Identification Number or visit www.irs.gov under the topic Employer ID Numbers on the Businesses Contents page to apply for an EIN.

 

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Raffle prizes, winnings and taxes

Don’t overlook the post-raffle details …

Calculating tax on prize winnings

Raffle winnings need to be run through a formula to determine the amount of tax owed

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.