Questions Regarding Taxes on Sweepstakes Prizing
February is the beginning of tax season so we thought it fitting to address some questions that we’ve received from winners and clients alike regarding paying taxes on sweepstakes prizing.
How will I know if I will have to pay taxes on a prize?
Any prizing that you win that totals over $600 in value will be reported to the IRS, and you will receive a 1099 for the tax year in which you accepted the prize. During the process of accepting a sweepstakes prize, you will be asked to fill out and sign a W9 form, so this will be your first indication that you will have to pay taxes on your prize. The amount of taxes that is paid is based on the individual, so it is recommended that you speak with a tax professional to determine what your taxes will be before you accept the prize. Here is a good article about prizing and paying taxes: http://www.marketwatch.com/story/you-win-and-now-you-owe-taxes-2014-03-12
How do I determine the ARV on a prize for tax purposes when running a sweepstakes?
We are often asked by our clients to determine the approximate retail value (ARV) of a prize for a sweepstakes. If the prize is an item that is sold by our client, that is the manufacturer’s suggested retail price, which we use to determine the ARV. If, however the prize is a service or trip, we do our due diligence to research the average price of the trip elements to ensure that the ARV is on target. For more information, see our previous blog article about ARVs here.
What if I accept a prize such as a trip but end up canceling at the last minute? Do I still have to pay taxes on the prize?
Ultimately this is up to the sponsor of the sweepstakes. If the trip elements were already booked and paid for by the sponsor, they will submit a 1099 to the IRS for the advertised ARV. However, if there are elements of the trip such as food or ground transportation at your destination that wasn’t pre-paid, you could dispute the ARV since those elements were never purchased by the sponsor. Here is an article about taxes on vacation prizes. http://contests.about.com/od/vacationsweepstakes/f/Which-Taxes-Do-You-Pay-On-Vacation-Prizes.htm
If you are a client thinking of running a sweepstakes or if you have additional tax questions, please contact us at email@example.com.