Should You Pay Taxes on Prize Money?
Ever find cash in a jacket or a pair of pants you haven’t worn in a while? Feels great, doesn’t it? It’s the kind of money you weren’t counting on that can help with a looming bill or be spent on something you could not otherwise justify buying.
While winning prize money might feel just as good as discovering your own money, the two are very different for tax purposes. So before going out and picking up that hoverboard (they’re not real hoverboards, btw), there is one caveat you should know. Unlike money found between your couch cushions, prizes are taxable.
Prize money is taxed as ordinary income.
Generally, the federal government taxes prizes, awards, raffle and lottery winnings, and other similar types of income as ordinary income, no matter the amount. This is true even if you did not make any effort to enter in to the running for the prize. Your state will tax the winnings too, unless you live in a state that does not impose a state-level income tax.
The tax rate will be determined by your income. So, for instance, if you make $42,000 annually and file as single, your federal tax rate is 25%. If you win $1,000, your total income is $43,000, and your tax rate is still 25%. It’s conceivable that a large prize could bump your income into a higher tax bracket. See all tax brackets for 2015 explained here.
How is prize money reported?
Typically, prize winnings will be reported to you in Box 3 (Other income) of IRS Form 1099-MISC, and will be reported on your tax return for the year in which the prize was awarded. That means, if you win the H&R Block 1,000 win $1,000 daily sweepstakes, you will report the winnings when you file taxes next year.
Because they payor may not be required to withhold income taxes it is advisable that you consult with a tax professional to determine if you should make estimated payments to cover the taxes resulting from the prize. That being said, once the tax implications are addressed you should still have plenty of prize money left over to cover the cost of that swagway.
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