Paying Taxes on Prize Money
Winning money on your favorite sweepstakes site is always completely thrilling. Oftentimes winners are in disbelief that they really won and sometimes say they won’t truly believe it until they see the check with their name on it. That’s a natural reaction because, although we’ve all seen big winners both on sweeps and lottery games, becoming one of those winners could seem surreal at first. Once you hold that check in your hands, though, the reality of that money being yours begins to sink in and your mind may be racing with all the ideas you have for what you’ll spend in on.
There are rules, however, which govern sweepstakes in the United States and one of them is taxes. That’s the harsh reality of any cash prize win. The federal government views it as income and therefore, the winner is required to pay income taxes on the money they’ve earned from the prize win.
If the amount of the win is over $600, or the value of the prize is, the sweepstakes site is required to request a tax form be filled out by the winner before they can release the prize money. This is a W-9 form they will send to the winner, so they have a record of where the money went and who owes the income taxes on it, which is a requirement by law. At the end of the fiscal tax year, the sweepstakes company will issue a 1099 form to the winner, which they also file with the IRS. This means, the winner must file taxes along with that form to show it as income on their tax return.
If the prize is under $600, the forms need not be filed, but it is still the responsibility of the winner to report it on their income taxes, because it is still considered income. For prize amounts under $600, the sweepstakes company who paid the prize money does not get involved with any tax form filings. That becomes the sole responsibility of the winner to include it as income when they file their personal income tax returns.
If someone wins a large cash prize, for example $10,000, and they refuse to submit a W-9 to the sweepstakes company, they cannot collect the prize money. They can opt for a much smaller amount, usually around $500 for a prize that large. It sounds strange, but there are people who refuse to fill out the tax form and, unfortunately, miss out on collecting their large cash prize award.
If you are fortunate enough to win a large sum of money, the best thing you can do is consult with an accountant on how to handle it. You’ll want to look for and hire a CPA (certified public accountant) to help you navigate filing your income taxes. If you don’t already have a trusted accountant, ask around and find out if people you know have someone they like to use to prepare their taxes.
If you did win $10,000 for example, that would be added to your annual income for tax purposes and your accountant will know exactly how to report it. They will also be able to advise you on other tax details such as claiming deductions for expenses and things along those lines. If you’re someone who files their own taxes using tax accounting software, you should be able to easily figure out where to insert that added income amount.
If you were to become the winner of a considerably large amount of money, say $10 million, it’s advisable to hire an attorney who is well versed in finance. Most celebrities and those who are in the higher income brackets making millions usually have reliable financial advisors they trust to handle the legal part of having that much money. Unless you know celebrities or wealthy people in the upper tax brackets you may have to do a bit of research to find someone trustworthy to help you handle your money management.