Aside from the winners, there's no one more excited about
sweepstakes prizes than the IRS. States that collect income taxes
get pretty tickled, too.
Many sweepstakes winners don't realize they have partners
when it comes to accepting their prize. The IRS and state
treasurers don't care who wins the prize because they are
guaranteed to receive a share of virtually every prize awarded.
(They may, however, root for a winner in the highest tax
Thompson Coburn's tax gurus can speak to this more
specifically, but here are some basic facts about state and federal
tax laws that sweepstakes creators need to know.
The IRS and many states consider the value of a sweepstakes
prize as "other income" for the winner and treat it like
his or her salary. If a sweepstakes has a cash prize, the
"income" is obviously the dollar amount of the prize. If
the prize includes non-cash items or services, it's the
sponsor's responsibility to determine the approximate retail
value (ARV) of each such prize.
If the ARV of the prize is $600 or more, the sponsor (or the
prize provider if the sponsor is not furnishing the prizes) must
notify the winner of the amount of "income" they will
receive and send the winner an IRS Form 1099-Misc. at the end of
One of the questions that I routinely receive is whether a
person who wins a prize valued under $600 has to pay any tax.
It's a widely held but incorrect belief by many that if the
prize value is less than $600, the winner isn't required to pay
any income tax. This myth may be based on the fact that a winner
will not receive a Form 1099 Misc. But that doesn't release the
winner from paying income tax. Sweepstakes winners are required to
pay taxes on the value of the prize they have won, regardless of
the value of that prize.
Sponsors should make it clear to all persons entering the
sweepstakes that the winner will be responsible for all taxes. At a
minimum, this language should be included in the official rules. I
generally like to put this disclosure in bold type
so that it is very conspicuous even if an entrant doesn't read
other portions of the rules.
Also, I don't believe the sponsor of a sweepstakes should
provide advice to a winner concerning tax laws and regulations. The
better practice is to tell winners that any such questions should
be directed to the winner's tax lawyer or advisor. Similarly,
because tax laws are constantly changing, I want to remind all
readers of this blog to consult with your own tax advisor before
creating your next sweepstakes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On October 5th, 2016, the Internal Revenue Service and Treasury Department published final, temporary and reproposed regulations1 under Sections 707 and 752 of the Internal Revenue Code of 1986, as amended.
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