Federal Income Tax Withholding: Raffle Prizes

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 "backup withholding.

The "backup withholding" rate is 28% of a prize.

• If an organization awards a single raffle prize of $600 or greater and the prize winner fails to provide proper identification for winnings, the organization must retain the "backup withholding of 28%."

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 prize.

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.