If your organization anticipates raising big amounts with a raffle at your next fundraising event, you might want to step back and consider what this might mean from a tax compliance standpoint. State laws vary, but the IRS has rules related to unrelated business income (UBI) that need to be followed, and raffle income may be subject to UBI tax. Here is what you need to know before you place all your bets on this event.
Taxing UBI
Not-for-profits must pay income tax on UBI, defined as income from a trade or business, regularly carried on, that is not substantially related to the organization's exempt purpose. The IRS considers raffles to be a form of gaming, which is a trade or business. If you routinely hold raffles, it is possible they could be considered "regularly carried on," and likely are not related to your exempt purpose. Keep in mind that, under the Tax Cuts and Jobs Act (TCJA), losses in another unrelated trade or business can no longer be used to offset UBI generated by your raffle.
However, not all is lost. Raffle income can be exempted from UBI tax if the raffle is conducted with "substantially all" volunteer labor. The term "substantially all" has not been formally defined, however the unofficial guideline of the IRS is that 85% or more of the labor running the raffle should be from volunteers. Remember to keep records to demonstrate your level of volunteer support.
Reporting winnings
Your not-for-profit must report when the winnings are $600 or more and at least 300 times the amount of the winner's wager (the raffle ticket price). You can deduct the wager amount when determining if the $600 threshold is met.
For example, assume that you sell $4 tickets and your winner receives $2,000. Because the winnings ($1,996) are more than $600 and more than 300 times the amount of the $4 wager, you must report them to the IRS.
You should file Form W-2G, and give a copy to the winner to show reportable winnings, along with related income tax withheld. The winner should provide you with his or her name, address, and Social Security number on a Form W-9, which will then be included on the filing. Copy "A" of the W-2G is due to the IRS by February 28 following the calendar year of the payment if you are filing on paper. If you file electronically, you have until March 31. The winner must receive copies "B" and "C" by January 31.
What about income tax?
Federal income tax must be withheld from the winnings and remitted to the IRS if the proceeds (the difference between the winnings and the amount of the wager) are more than $5,000. If the winnings are not in cash (for example, a vacation package or motor boat), the proceeds are the difference between the fair market value (FMV) of the item won and the wager amount. When the value of a non-cash prize is not obvious, it is wise to obtain a valuation before the drawing.
Effective for tax years beginning after December 31, 2017, you must withhold 24% (previously 25%) in tax from the winnings. Note that the 24% rate applies to the total amount of the proceeds from the wager, not just the amount that exceeds $5,000. Say that you hold a raffle with $1 tickets. The winner receives $6,000, but because the proceeds ($5,999) exceed $5,000, you must withhold $1,440 ($5,999 × 24%).
For a non-cash prize with proceeds of more than $5,000, you have two options:
- The winner reimburses you the amount of withholding tax that you must pay to the IRS; or
- You pay the withholding tax on behalf of the winner, calculated at 31.58% of the FMV less the wager.
Taxes withheld from raffle winnings must be reported on Form 945, Annual Return of Withheld Federal Income Tax. Include the total amount of tax withheld that you reported on all the Forms W-2G filed for the year.
If taxes withheld are under $2,500 in total, use Form 945 and file by January 31 following the close of the tax reporting year. If they are greater than $2,500, file them on a monthly or semiweekly basis.
More to handle
Your organization might be required to withhold 24% (formerly 28%) of raffle prizes for federal income tax backup withholding if the winner does not furnish a correct Social Security number. Ask your CPA for more details on this and other raffle requirements.
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.
