Individual raffle prizes have the
potential to be $600 or greater. It is imperative that organizations
holding raffles be aware of the federal income tax withholding requirements.
The following was reviewed by the IRS on November 23, 2004.
IDENTIFICATION: The winner of
a single raffle prize of $600 or more must provide the organization with proper
identification. Two types of identification (e.g. driver license, social
security card, voter registration card, etc.) should be furnished by the winner
to verify his or her name, address, and social security number (SSN).
W-2G: If an organization
awards a single raffle prize of $600 or more, they must file Form W-2G.
WITHHOLDING: It is important
that organizations understand the difference between "regular gambling
withholding" and "backup withholding" of federal income tax.
The "regular gambling
withholding" rate is 25% of a prize.
If an organization awards a
single raffle prize with a value between $600 and $5,000 and the prize
winner provides proper identification, no withholding is required.
If the prize amount is more than
$5,000, the organization must obtain proper identification from the winner
(as described above) and withhold 25% of the prize. If the organization is
unable to obtain proper identification, they must withhold the higher
The "backup withholding" rate
is 28% of a prize.
EXAMPLE: Organization XYZ paid a
prize of $1,300. The winner would only give his name as J. Doe and did not
provide proper identification. Organization XYZ should collect backup
withholding of $364 ($1,300 x 28%), pay the winner $936 ($1,300 - 364), and file
Form W-2G. If the winner had provided XYZ with proper identification
(including social security number), no withholding would be required; however,
the organization would still be required to file Form W-2G.
MERCHANDISE PRIZE: If the
prize is not cash, the fair market value of the item won is considered the
amount of the winnings. The withholding and backup withholding rates, if
required, are applied to the fair market value of the item won. The amount
to be withheld should be collected from the prize winner prior to awarding the
LIABILITY: The organization
is liable for paying the applicable backup withholding to the IRS, regardless of
whether or not it is collected from the prize winner. The best time to
collect backup withholding is before the prize is paid! Organizations must
report withholdings on Form 945 by January 31 of the following year.
|Employees of the Michigan Lottery are
not agents of the IRS nor are they tax consultants. Each
organization should contact a licensed professional or the IRS for more
information. To contact the IRS Exempt Organization Unit, call
877-829-5500. To receive a copy of Publication 3079 or other tax
publications or forms, call 1-800-829-3676 (FORM) or go to the IRS
website at www.irs.gov.