SVP, Fae Savignano contributed this informative post on what sponsors need to know about filing and processing winner W-9’s and 1099’s for their promotions.
Sponsors of Promotion Games of Chance offering and awarding prizes valued at $600 or more should be aware that they are responsible to obtain a signed, legible copy of an IRS form W-9 from every winner that they issue a prize to. This means that any eligible entrant who has been verified as a prize Winner you issue a prize of $600 or more to, will need to fill out a W-9 form for you to keep on record, regardless of the number of times in the course of a tax year the same person wins a prize. In addition, if one person wins multiple lower valued prizes within the same year, which when added together total $600 or more, they too will be required to complete a form W-9. It is not necessary to send the actual or copy of the W-9 to the IRS; however, the information contained thereon will be used by the Sponsor to complete an informational report for the IRS, such as a 1099-MISC form for each appropriate Winner. And, the Sponsor must send a copy of the 1099-MISC form to the appropriate Winner by mail, postmarked by January 31st of the year following the year in which said prize was won, and to the IRS by February 28th. Please note that there are associated penalties that may be imposed by the IRS if this requirement is not adhered to. As tax laws change frequently, please refer to the IRS website directly for the most recent updates, forms and information.
The Official Rules governing the Promotion and the notification documents sent to the potential Winners should clearly state what the requirements of accepting a prize entails, the forms that you are requesting them to fill out, and how their tax information will be used. The potential Winner should be made aware that they will be responsible for any taxes imposed on their prize (including, but not limited to all local, state and federal taxes) and therefore are required to complete and deliver to the Sponsor, a completed W-9 form. Their notification documents should also advise the Winner to consult with their tax advisor. The form will ask for the recipient’s name, address, their taxpayer identification number, date and signature. Needless to say, the W-9 form contains sensitive information which should be kept private and secure. The sender should be instructed by the Sponsor (or their designated Agency/Administrator) to send this form as a secure or encrypted email attachment or via mail.
The Internal Revenue Code mandates that the value of prize (considered as “other income”) be included in the Winner’s gross income. If the value of the prize is $600 or more, the Sponsor (or their designated Agency/Prize Provider) must file with the Internal Revenue Service a Form 1099 (with a copy to the Winner) reporting the value of said prize, as explained above. The information provided on the 1099 Form will include the Sponsor’s, name, address, their tax ID number, value of the prize, winner’s name, their address, and their social security number. The amount of tax a Winner must pay on the prize received is determined on the Winner’s income and the tax bracket they fall into. When the prize is cash, the value to be reported on their 1099 form will be the dollar amount of the prize (face value). If the prize is not cash or its equivalent, then the approximate retail value (ARV) or the fair market value (FMV) of the prize must be reported. Although the Official Rules may post a specific ARV of a prize (other than cash); the amount reported on the 1099 form should reflect the actual cost expended by the Sponsor which may be less than the posted ARV or, if the prize is a vehicle, the manufacturer’s suggested retail price (MSRP). The Sponsor may (in their sole discretion) decide to assist the Winner by offering additional cash as part of their prize to assist them in paying any taxes due on the prize they received. However, it should clear to the Sponsor and to the Winner that any additional cash offered/received for this purpose will also be considered and reported as taxable income to the Winner. There may be instances when the amount noted on the 1099 form is disputed by the recipient Winner. The Sponsor may (in their sole discretion) revise the 1099 form amount if there is valid proof that the FMV of the prize won is lower than the ARV value reported.
Taxes on Prizes Under $600
Another point to keep in mind is that if a Winner wins a prize valued under $600 they will not receive a 1099 form; however, this does not preclude them from reporting their winnings as “other income” and from paying income taxes.
Although we are not tax lawyers we are very knowledgeable professionals with extensive experience in running promotions, authoring Official Rules and prize claim documents, notifying potential Winners, verifying/clearing Winners, awarding/fulfilling prizes and processing 1099’s. Contact us.