In the United States, prize winners must pay taxes on their prizes as if they were income. However, there's a persistent sweepstakes myth that says that you only have to declare prizes worth $600 or more on your taxes.
This is not true. In the United States, you are required to declare all your prizes on your taxes, no matter how much they are worth. There's a very good reason why you shouldn't get your tax advice by word of mouth instead of from a licensed tax professional.
Where Does the $600 Sweepstakes Myth Come From?
$600 seems a pretty specific amount to come from thin air, right? Why do so many people believe that only bit prizes must be declared on their taxes? There are two main reasons:
- Sweepstakes sponsors must report prizes worth $600 or more to the IRS: Sweepstakes sponsors are required to submit a 1099 form for "prizes and awards that are not for services, such as winnings on TV or radio shows" if those prizes are valued above $600.
- Casinos and gambling institutions are required to withhold taxes on winnings above $600. The IRS has special rules for gambling winnings over this amount. To ensure taxes are paid properly, they withhold part of the prize value.
As you can see, however, these rules around prizes worth $600 and more don't apply to individuals who win through random drawings or contests.
First of all, you're not a sweepstakes sponsor. The IRS says you must report your sweepstakes winnings as "Other Income," no matter what the value. The rules for when and how sponsors report the prizes they give away don't affect you.
Secondly, sweepstakes prizes are not the same as gambling winnings, according to the IRS' rules. Remember, you don't pay money to enter sweepstakes! Sweepstakes prizes and gambling wins are reported and taxed differently. If a sweepstakes sponsor tries to withhold some of your winnings, you need to take extra care that you are not dealing with a sweepstakes scam.
Remember, too, that although sponsors must file a 1099 form for prizes over $600, they can report prizes of any amount to the IRS.
If a sponsor reports you as a winner but you don't report the prize on your taxes, the IRS might notice the discrepancy and investigate... and no one wants that. It's safer to follow the rules and report all of your winnings.
How to Keep Track of Your Prizes
When you win a lot of prizes, it becomes difficult to keep track of how much you need to declare on your taxes. To stay organized, you need to keep good records of your prize wins. Keeping a spreadsheet of your wins is helpful in many ways, including making sure you actually receive the prizes you've won.
Doing your annual taxes is so much easier when you have all the information you need right in a spreadsheet. All you need to do is total up the prize value column and you'll know what you need to put on your tax forms. A few seconds of effort after winning a prize can prevent a lot of stress at tax time!
This article is not intended as official tax advice. Tax laws change and individual situations vary. Please consult a professional for any tax questions you have.