After our recent Abundance Bound Facebook contest, I received a wonderful email from Erin Cronican at The Actor’s Enterprise. I thought this excellent question she poses may be something you’re also curious about, so I’d like to post the question and answer here.
Your contest had me wondering, and I’m curious if you can cover this in a blog post: what are the financial ramifications of accepting prizes – either cash prizes, or physical prizes? Using your contest as an example, what kind of taxes would I owe on the prize I received, and how would I know the right tax form to use? Does a company like yours have to provide a statement at the end of the year to the winner, who then files using that data? Do you know how that all works? I ask both as an individual (who may want to enter a contest) and as a business owner (who may want to share your brilliant idea and have a contest of my own.)
The Actor’s Enterprise
Thanks so much. It’s been fun hosting our first contest and I’m happy to take you through my process if you ever want to try it out.
The quick answer to your question is that there is no report of your winnings to the IRS unless the prize value exceeds $600. The total amount won (minus any available deductions) is entered on your 1040 (it goes on line 21 as “other income” unless it’s been changed in the last couple of weeks) when you file taxes. As a business owner, you can deduct the value of the prizes you give away as a business expense. You’ll need to send out IRS Form W-2G to the winner if it’s over $600. Remember to keep track of how much you gave away and who were the recipients of your prizes. Of course, although these are the rules for nearly all of us, it’s always best to ask your accountant how to claim these expenses.
Here’s a good article at the financial site Bankrate.com. Although it’s about how to report gambling winnings, any sweepstakes would qualify similarly.
Thanks for your question!