Are you wondering if awards count as income? The answer is yes. In general, cash and rewards given to employees for their good work or suggestions are taxable income, since they are presented in exchange for an employee's performance or services. Merchandise or products won as a prize or award will also be considered at their fair market value and could be considered taxable income. In this article, we'll discuss the tax implications of awards, prizes, sweepstakes, lottery and other types of income.
We'll also explain the rules for gifts to employees, students and non-employees, as well as the exceptions to the general rule. Read on to learn more about how awards count as income.
Tax Implications of AwardsIn general, the tax reporting rules are the same for gifts as they are for prizes and awards. It is considered taxable income for the employee, student or non-employee who receives it. The amount of a donation to an employee must be included on their W-2 form and is subject to all FICA income taxes and withholding, unless the donation is compensation for seniority in service. Gifts to students and non-employees are declared on a 1099-MISC form.
Awards that are considered scholarships or scholarships for students who are U. S. citizens or resident aliens do not require withholding taxes or filing taxes. All prizes of this nature paid to non-resident foreign students must be declared on the University of Washington Form 1042-S; unused amounts for tuition, books and fees must be withheld at 14%.The IRS says that cash rewards for exceptional performance are taxable income for employees.
Non-cash gifts for the duration of service or safety awards are accepted, provided they are not too valuable.
Merit AwardsWhat if you're lucky enough to win a merit award for your outstanding contributions to science, art, or your community? Do you have to pay income taxes on the amount? The short answer is yes. Unsolicited merit prizes or awards are fully taxable, with one exception for cash prizes received from the United States Olympic Committee for having competed in the Olympic or Paralympic Games.
Found MoneyHave you ever found money in a jacket or pair of pants that you haven't worn in a long time? Feels great, doesn't it? It's the amount of money you didn't count on and that can help you pay an impending bill or be spent on something that otherwise couldn't justify the purchase. While earning money may feel as good as discovering money in your pocket, the two things are very different for tax purposes. So before you go shopping, there's a warning you should know: unlike found money, profits are subject to taxation.
Taxable IncomeDid you know that income taxes must be reported as ordinary income? Yes, it's true. The federal government taxes prizes, prizes, sweepstakes, lottery and other types of income similar to ordinary income, regardless of the amount.
This is true even if you made no effort to participate in the race for the prize. Your state will also tax profits, unless you live in a state that doesn't impose an income tax at the state level.
Tax Reporting RulesIn general, taxes on winnings, such as sweepstakes or cash prizes, must be reported in box 3 (other income) of the IRS Form 1099-MISC. This includes winnings from sweepstakes in which you haven't made any effort to participate, and also applies to products won in a game program. Income tax must be declared in box 1 (reportable earnings) of the IRS Form W-2G. This includes lottery winnings, drawings in which you participated by placing a bet, church lottery tickets, or charitable drawings. You can request a deduction broken down by the amount of your bet only to the extent of your winnings.
Tax Implications of Property & ServicesIf you receive your earnings on property or services, you'll need to include the fair market value of your earnings on your tax return.
Since the payer may not be required to withhold income taxes, it is recommended to consult a tax advisor to determine if you must make estimated tax payments to cover taxes resulting from earnings.
ExceptionsTangible golf clubs, a tablet, a watch or Godiva chocolates may be the exception if they are not awarded for their achievements but rather as a reward for safety or seniority. Section 74 (b) establishes the exclusion of gross income from any amount received as a prize or award if (such prize or award) was awarded primarily in recognition of the recipient's past achievements in religious, charitable, scientific, educational, artistic, literary or civic fields; (the recipient) was selected without any action on his part to participate in the contest or procedure; and (the recipient) is not required to provide substantial services in the future as a condition of receiving the award or prize.
Seniority AwardsSeniority awards awarded to a person before five years or two awards have elapsed in a five-year period are fully taxable. Tangible personal property awards awarded to employees for length of service are not considered employee income if the value does not exceed $400 per year.
Gross AccumulationIn case of gifts, prizes and awards to employees, the department may request that payroll department “gross accumulate” value of gift prize or prize so that net payment is prize or amount desired prize.
Tax Implications For GolfersTaxing professional golfers can be complicated and confusing. Learn more about complicated tax issues for golfers such as travel deductions and residency rules with H&R Block.
Renting A Room In Your HouseAre you thinking of renting a room in your house? Learn more about potential tax implications from experts at H&R Block.
Calculating Taxable IncomeFinding your taxable income is an important part of filing taxes.
Learn how to calculate your taxable income with help from H&R Block experts.