There are a lot of rules to remember when nonprofit organizations hold raffles. Here is a summary of those rules to keep in mind and to help with planning in advance of the raffle.
- If the raffle prize is valued at $600 or more AND at least 300 times the raffle ticket price, you must REPORT to the IRS by completing a Form W-2G. Keep in mind that you will need certain information from the raffle winner, such as name, address and social security number.
- If the raffle prize is valued at $5,000 or more, you must REPORT and WITHHOLD income tax from the winner at the time of turning over the prize. For example, the raffle prize is a diamond necklace valued at $10,000. Before turning over that necklace to the winner, the winner must write you a check for the withholding amount. The withholding rate is 28%.
- If the organization decides to pay the withholding taxes on the winner’s behalf, the amount that the organization pays in to the IRS should be 33.3% of the original prize value, since the winner is getting this “extra” value of not having to pay the withholding. Therefore, they have to include this “extra” value as income on their W-2G.
- If the winner refuses to provide you with their social security number AND the prize is valued at $600 or more, the organization must WITHHOLD taxes at the 28% rate. Normally, you wouldn’t have to withhold if the prize value is less than $5,000, so this is a special circumstance when the winner refuses to provide his or her social security number.
- Once you withhold taxes, you have to pay those taxes into the IRS. You do this by completing Form 945 at the end of the year. But if the amounts collected are greater than $2,500, you will need to pay those amounts before the end of the year.
- Also at the end of the year, you will need to file the Forms W-2G with the IRS. You will need to submit these forms along with the summary Form 1096.
By Colette Kamps, CPA