Tax Implications of Prizes, Awards, and Gifts

When it comes to calculating the amount of tax that will be withheld for prizes, awards, and gifts, the fair market value of the item should be considered supplementary salary, which has a withholding rate of 28%. In 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, as defined in the following table.

Gifts

Gifts to students and non-employees are declared on a 1099-MISC form.

Have 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. Did you know that income taxes must be reported as ordinary income? Yes, it's true.

The federal government taxes prizes, awards, 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. In 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. If 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.

Tax Implications for Merit Awards

That said, once the tax implications are addressed, you may still have enough profits left to cover the cost of the coveted item you want to purchase.

What 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. The IRS says that cash rewards for exceptional performance are taxable income for employees. Non-cash gifts for duration of service or safety awards are accepted provided they are not too valuable. The company must present the awards with enough fuss to show that they are special, not just a sneaky form of tax-free wage awards.

Tax Implications for Employees

In the case of gifts, prizes and awards to employees, the department may request that the payroll department “gross accumulate” the value of the gift, prize or prize so that the net payment is the prize or amount of the desired prize.

A security achievement award if you are a manager, administrator, administrative employee or other professional employee or if more than 10% of eligible employees have previously received security achievement awards during the year. Tangible golf clubs, a tablet, a watch or Godiva chocolates may be exempt if they are not awarded for their achievements but rather as a reward for safety or seniority. Certain employee achievement awards (tangible personal property items) if awarded under a college-wide seniority program or other achievement program may be excluded from gross income. The gift prize or prize form must be used to report any gift prize or prize awarded regardless of amount. A seniority award if you received it for less than 5 years of service or if you received another seniority award during previous year or 4 years assuming that requirements for qualified plan awards are met each award alone would be excluded from revenue.

Seniority awards awarded to person before five years or two awards have elapsed in five year period are fully taxable. If you receive several awards in a year those figures apply to total not each individual award.