Taxes on Winnings
Winning prizes is very exciting, and the notion of paying taxes for them shouldn’t diminish the excitement or evoke fear. A very general idea of what you will owe for a prize in taxes is about a third of the prize value. Meaning, if you won $6,000 you will be paying roughly $2,000 to taxes. This might sound like a lot, but remember that the $4,000 difference was money you didn’t have before winning!
Below we will list some steps to help you pay your winning taxes:
Record Your Wins and Expenses
Good record keeping will make paying taxes on your sweepstakes wins so much easier. Keep a ledger or a spreadsheet where you record information about your prizes, including the name and sponsor of each contest you win, the date you expect to receive the prize, the date the prize actually arrived, and the Approximate Retail Value of the prize and the Fair Market Value of the prize.
Collect 1099 Forms from Sponsors
If you had any wins with a prize value of more than $600, you will receive a 1099-MISC form from the sponsor at the end of the year. Many sponsors will send 1099-MISCs for smaller prizes as well. You will need to include the information from these forms on your taxes, and you’ll want to keep copies for your records. By law, sponsors must mail these forms by January 31st.
Total the Value of Your Wins
There’s a common misunderstanding that someone only needs to report prizes worth $600 or more. This is not true, all prizes are legally required to be reported on US taxes. This means you will need to add together the value of all of your winnings throughout the year. This number will be entered under “Other Income” on line 21 of your 1040 form.
Have a Tax Professional Review your Taxes
The only way to be certain that your taxes are filled correctly is to have a professional take a look. Sweepstakes taxes can sometimes complicate your tax return a bit, so it’s better to have a tax agent make sure you don’t get penalized at a later date.