For many exempt organizations, raffles can be an attractive way of generating additional revenue to support the organization’s ongoing program services. Common examples include raffling off a car or a 50/50 drawing. Organizations choosing to sponsor a raffle should be aware of the various federal reporting requirements involved. These requirements may include obtaining and reporting prize information to the Internal Revenue Service, and withholding and remitting federal income tax on the prizes.
Reporting Raffle Prizes
The IRS generally considers a raffle to be a form of lottery or gambling. An organization must report raffle prizes to the IRS if:
- The amount paid to the winner (reduced by the amount paid for the wager) is at least $600, and
- The payout is at least 300 times the amount of the wager.
The organization should use Form W2-G, “Certain Gambling Winnings,” to report this information to the IRS.
Example A: Eric attends a local fundraising event. At the event, the organization holds a 50/50 drawing. Eric purchases a $1 ticket and when the winning numbers are called, he wins $800. The organization must file Form W-2G with the IRS to report Eric’s winnings. The organization must also give a copy of Form W-2G to Eric, for him to use in preparing his individual tax return for the year.
Exempt organizations must use Form 1096 to transmit all Forms W-2G to the IRS. Form W-2G must be furnished to the individual by January 31 of the year after the raffle is held. Form 1096 is due to the IRS by the last day of February in the year after the raffle is held.
Tax Withholding on Raffle Prizes
Raffle prizes exceeding $5,000 are subject to 25% federal income tax withholding. The tax withholding amount is reported to the IRS on Form W-2G. If the organization fails to withhold the tax correctly before distributing the winnings, the organization is liable for the withholding tax.
Example B: Same example from above, but now Eric wins $5,500. His net prize of $5,499 (total winnings less the amount paid for wager) is above the $5,000 withholding threshold. The exempt organization must withhold 25% ($1,374.75) federal income tax from Eric’s payout and remit these taxes to the IRS.
Note that the withholding percentage will increase to 28% if Eric fails to provide his correct social security number or individual taxpayer identification number to the organization.
The same reporting thresholds apply to noncash prizes; however, since there is no cash involved, the organization must either collect the tax withholdings directly from the winner or pay the withholding tax on the winner’s behalf.
If the organization pays the taxes required to be withheld as part of the prize, then the tax is calculated not only on the fair market value of the prize less the wager amount, but also on the taxes it pays on behalf of the winner. This is because the winner is deemed to receive income for the taxes paid on his or her behalf. As a result, the organization must pay withholding tax of 33.33% of the prize’s fair market value. The organization reports the grossed-up amount of the prize (fair market value of the prize, plus amount of taxes paid on behalf of winner) and the withholding tax paid on Form W-2G.
Example C: Eric purchases a $1 raffle ticket, for a chance to win a car valued at $12,000. The drawing is held and Eric wins the car. Since the value of the prize exceeds $5,000, the tax on the fair market value of the prize is $2,999.75 (($12,000-$1) x 25%). Eric must pay $2,999.75 to the organization to remit to the IRS on Eric’s behalf. The organization would report $11,999 as winnings and $2,999.75 as tax withheld on Eric’s Form W-2G.
Example D: Same as Example C, but this time the organization pays the taxes on Eric’s behalf. The organization must pay 33.33% of the amount of the winnings to the IRS. The amount to be paid on Eric’s behalf would be $3,999.27 (($12,000 – $1) x 33.33%). The organization would report $15,998.27 as gross winnings and $3,999.27 as withholding tax on Eric’s Form W-2G.
Remitting Tax to the IRS
Organizations must generally remit the withheld taxes to the IRS using electronic funds transfer. The organization must also file Form 945, “Annual Return of Withheld Federal Income Tax,” with the IRS by January 31 of the year after these taxes were withheld.
In the case of shared winnings, the recipient must also complete Form 5754, “Statement by Person(s) Receiving Gambling Winnings.” When the person receiving winnings is not the actual winner, or is a member of a group of two or more winners on a single ticket, the recipient must furnish the organization information listed on Form 5754, and the organization must file its Forms W-2G based on that information. The organization must keep Form 5754 for four years and make it available for IRS inspection.