Raffles have grown in popularity amongst public charities in recent year, and for good reason. Organizations that host these events often find that they are a great way to raise funds and to promote awareness for their causes. While the income tax aspects of these events are not overly complex, there are some issues that your organization should be aware of before hosting one yourself. The following is intended to provide a general overview of the tax compliance requirements for tax-exempt organizations conducting a raffle.
The first important thing to keep in mind is that raffle winnings are taxable income to the recipients, whether the prize is comprised of cash or non-cash items. Prize winners are required to report and potentially pay tax on their winnings on their annual Form 1040 filings. Organizations may be required to file Form W2-G to report gambling or prize winnings to the IRS and to the recipient if two thresholds are met. The W2-G thresholds are different depending on the type of gaming event held. But, specifically for raffles, a W2-G is required if the amount or value of the prize winning less amounts paid for participating is over $600 and over 300 times the amount that the winner paid to participate. For example, if an individual pays $10 for a winning raffle ticket, a Form W2-G needs to be filed if the cash prize is in excess of $3,000 ($10 x 300). In a contrasting example, if an individual pays $1 for a raffle ticket and wins $500, a Form W2-G is not required since the net amount of the winnings ($500 less $1) is under $600.
Form W2-G is also used to show regular and backup withholding amounts for gambling and prize winnings. Similar to withholding on an employee’s salary, your organization may be required to withhold income tax on the prize winnings of a raffle you host. If the amount of the winnings less the amount paid for participating is over $5,000, 25% of the net winnings is required to be withheld and remitted to the IRS. For example, if an individual pays $30 for a raffle ticket and wins $6,000 in cash, your organization is required to withhold federal tax of $1,493 ($6,000 less $30 in ticket cost multiplied by 25%). The organization uses Form 945, Annual Return of Withheld Federal Income Tax, to report and send the withheld amounts to the IRS.
Things get more complicated if a non-cash item is awarded as a prize. First, it will be necessary to determine the value of the prize. For certain items that are difficult to value, such as works of art or antiques, it may be advisable to have the item appraised by a qualified and licensed appraiser before the raffle is to take place. For common items that can be routinely purchased, such as vehicles or merchandise, the item’s retail price can generally be used to assign a value.
Moreover, the 25% tax withholding discussed above is required even with respect to non-cash items. For non-cash prizes subject to withholding, the winner can pay the organization 25% of the prize’s value for the organization to send to the IRS as withholding. Otherwise, the organization would pay the withholding on the winner’s behalf. However, instead of 25%, the organization would be required to pay in 33.33% of the noncash prize’s value less the ticket cost, because the withholding itself is now part of the prize. Thus, the organization should strongly consider collecting the cash for the tax withholdings from the winner up front before the prize is delivered.
States have their own rules regarding withholding of their income taxes from raffle winnings. For example, Maine requires tax withholding at a rate of 5% if federal withholding is required. Massachusetts requires withholding for net raffle winnings of $600 or more, which is stricter than the federal $5,000 threshold.
Form W2-G is filed with the IRS and also sent to the winner for his or her personal income tax records. The due date of filing the W2-G with the IRS is February 28 in the calendar year after the winnings were paid, and the winner must be provided copies by January 31. The winner’s name, address, and social security number or other tax identification number is required to be included on the form, so make sure to obtain this information from the winner. Failing to do so will require that the organization comply with backup withholding rules. For the same withholding thresholds mentioned above, organizations that do not obtain or are not provided with a winner’s social security or tax identification number must withhold 28% of the prize winnings.
Another reporting requirement relates to your organization’s yearly Form 990 filing. If total proceeds from the raffle are in excess of $15,000, your organization will need to file Schedule G, Part II with the Form 990. Schedule G, Part II discloses the financial details of a tax-exempt organization’s fundraising event activities. Since this information is separately disclosed in the 990, it is important to maintain accurate and detailed records of any fundraising event your organization hosts.
It should be noted that there are other nuances and also exceptions to most of the items outlined above. Additionally, other tax reporting requirements may exist depending on the event or the type(s) of winners involved. For additional information on the more particular tax filing nuances of raffle or other gaming events, please consult your BNN tax advisor.