Raffle Prizes Reporting
Posted on Wednesday, May 31, 2017
Many nonprofit organizations hold raffles to raise additional funds. If your organization is planning on holding a raffle, make sure you are aware of the requirements for reporting the winnings and withholding income taxes.
The IRS considers raffles as a type of gaming, along with 50/50 drawings, pull tabs, lotteries, bingo and similar games of chance. If your organization pays the raffle winner(s) more than a certain amount, you must report information about the winnings to the IRS. The amount depends on the type of activity. An organization must report raffle winnings if:
1. The amount paid is $600 or more, and
2. The payout is at least 300 times the amount of the wager.
In determining whether the $600 requirement is met, the winnings are reduced by the amount of the wager. For example, John purchases a $3 raffle ticket and has the winning number. He wins $1,000. Because the winnings of $997 ($1,000 winnings less $3 wager) are greater than $600 and more than 300 times the amount of the wager, his winnings must be reported to the IRS. The nonprofit reports these winnings to the IRS using Form W-2G, Certain Gambling Winnings. Form 1096 is used by the organization to transmit Form W-2G to the IRS and is due February 28th following the calendar year in which the winnings were paid. The organization must also provide a copy of Form W-2G to the winner by January 31 following the calendar year in which the winnings were paid so that he can report the winnings on his individual tax return.
Nonprofits are also required to withhold and remit income tax at 25%, if the winnings less the wager are more than $5,000. If John won $6,000 with his $3 raffle ticket above, the organization would be required to withhold and remit to the IRS $1,499.25 ($6,000 - $3 = $5,997 x 25%) of income taxes from his winnings. The amount withheld is reported by the organization on Form W-2G to the IRS. The amounts withheld are reported on Form 945, Annual Return of Withheld Federal Income Tax and due to the IRS by January 31st following the calendar year in which the winnings were paid.
The same reporting and withholding requirements apply to noncash prizes. The fair market value of the prize is used as the value of the winnings. Since there is no cash to withhold the income taxes from, the organization can either collect the taxes from the winner or pay the taxes on the winner’s behalf.
Assume that John won a car with a fair market value of $10,000 with his $3 raffle ticket. If John pays the organization the amount of income taxes to be remitted on his behalf, he would need to pay $2,449.25 ($10,000 - $3 = $9,997 x 25%). The organization would report winnings of $9,997 and $2,449.25 of withholdings on Form W-2G.
Or the organization could pay the income taxes on John’s behalf. When the organization pays the income taxes, John receives the value of the prize and the value of having the taxes paid for him so the withholding rate is 33.33% instead of 25%. The organization would pay $3,332.00 ($10,000 - $3 = $9,997 x 33.33%) of income taxes to the IRS. Form W-2G would show $13,329.00 of winnings and $3,332.00 of withholdings.
For additional requirements on charity gaming for your next raffle, see our blog, Charity Gaming Requirements.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.