There are two types of withholdings on winnings: regular and backup. If a payment is already subject to regular withholding, it is not also subject to backup withholding.
For regular withholding, the organization must withhold 24 percent (formerly 25 percent) of the prize and report it to the IRS:
- For sweepstakes, wagering pools, lotteries, raffles, or poker games, when the prize exceeds $5,000; or
- For any other game, when the prize amount is at least 300 times the ticket cost.
The ticket cost is subtracted from the prize in calculating these amounts.
Example: Raffle tickets cost $1, and the grand prize is $6,000. The winner’s proceeds from the raffle exceed $5,000 after subtracting the ticket price, so the organization must withhold 24 percent from the winnings. The 24 percent rate applies to $5,999 (proceeds from the prize less ticket cost), bringing the withholding amount to $1,440.
Non-cash prizes are subject to regular withholding as well—though the process is more complex. There are two options. The first is a tough sell for prizewinners because it asks them to pay the withholding tax to the organization. They would pay 24 percent of the fair market value of the prize after subtracting the ticket cost. The second option keeps the winner happy but costs the organization more. The organization pays the withholding tax on the winner’s behalf, but at a higher rate of 31.58 percent. The higher rate reflects that the winner acquired not only the prize, but also the value of having the organization pay the tax on it.
Alternatively, backup withholding applies if the prizewinner fails to provide the entity with a correct taxpayer identification number, there was no regular withholding on the winnings, and the winnings are at least $600 and at least 300 times the ticket cost. The backup withholding rate is 24 percent (formerly 28 percent).