Tax Law on Sweepstakes Prizes Less Than $600
If you visit sweepstakes forums or chat with fellow sweepers, you might come across a common piece of folk wisdom: Residents of the United States only have to declare prizes worth $600 or more on their yearly taxes.
But 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. Listening to this piece of advice could get you in hot water with the IRS.
There's a commonly-quoted sweepstakes myth that prizes worth less than $600 are exempt from taxes, but it's not true. In the United States, you have to pay taxes on all of the prizes you win, no matter what their value is. Even small prizes are taxable.
Where Does the $600 Sweepstakes Myth Come From?
There are two reasons why people think that sweepstakes prizes are exempt from taxes if they are valued at less than $600:
- Sweepstakes sponsors are obligated to report prizes valued at $600 or more to the IRS: According to the IRS' Instructions for Form 1099, 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 worth more than $600, including withholding some of the prize value to put toward taxes. See the Instructions for Forms W-2G and 5754 for more details.
However, neither of these issues affect how you, as a sweepstakes entrant, have to declare your taxes.
- The rules for sweepstakes sponsors don't apply to you: The IRS says you must report your sweepstakes winnings as "Other Income" no matter what the value. The rules for when and how the sponsors report their winners to the IRS don't affect you.
- Sweepstakes prizes are not gambling winnings: 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 law and report all of your winnings.
How to Keep Track of Your Prizes
If you win a lot of prizes, it can be difficult to keep track of how much you need to declare on your taxes. Keeping good records of your prize wins can be a huge help. Keeping a spreadsheet of your wins is helpful in many ways, including making sure you actually receive the prizes you've won.
But when it comes to doing your yearly taxes, a spreadsheet of your wins makes declaring your prizes a snap. 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!