Raffles are one of the most common fundraising tools used by nonprofits. Whether they are part of a larger fundraising event or by themselves, raffles are typically easy to run, a great way to spread the word about your organization and most supporters will play a game of chance for a good cause they support.
I purchased a $10 raffle ticket from a local nonprofit for a chance to win a cash prize. 1 winner would be drawn to win $6,000 and a 2nd winner would be drawn to win $1,000. I felt good about supporting the organization and of course I would have been super excited to win a sizable cash prize. While I did not have the luck of winning, I did sit at the same table as Jack, the grand prize winner. It’s amazing how contagious that winning feeling is just by sitting next to someone that won $6,000.
So if your organization was hosting this raffle, would you know to issue a tax form to the winners? I’ve worked with nonprofits that never consulted their accounting/tax professional or referenced the IRS publications, and mistakenly issued a 1099 to the winner. It’s not an uncommon error since the 1099 forms are the most common tax forms to report payments over $600 for a variety of reasons, one of which is in Box 3 or Box 7 for prizes and awards.
The difference here is that a wager was made. If a wager is made, the winnings are reported on Form W-2G and in some instances the nonprofit may need to withhold taxes.
So let’s look at what conditions need to exist in order for your nonprofit to report the payout.
Jack paid $10 for the raffle ticket and won $6,000. This is a winning of over $600 and 600 times the wager. So the nonprofit needed to file a Form W-2G with the IRS and give a copy to Jack.
But wait, there’s more the IRS needs you to do…
There is an additional condition where the nonprofit must withhold tax if the winnings are more than $5,000. Failure to do so before distributing the prize makes the nonprofit liable for the withholding tax. In the case of the 2nd place winner who got $1,000, no reporting is necessary even though it was over $600 because the payout was only 100 times the wager. Keep in mind that when dealing with non-cash prizes or shared winnings, there are other conditions and guidelines that go into determining filing and withholding requirements. You can reference the IRS publication on this topic here.
Many nonprofits are full of passion but strapped for resources. Unfortunately, this sometimes means the finer details in tax compliance or accounting gets lost in the focus of fundraising and executing your mission. Even the easiest of fundraisers require a high level of diligence to make sure you are in compliance with state and federal laws.
Question: Has your organization ever hosted a raffle fundraiser? If so, what was the best or biggest prize you ever awarded? Share your comments below!