Raffles are commonly used by nonprofit organizations to raise funds to fulfill the mission of their organization. Raffles are defined by the Internal Revenue Service (IRS) as “a method for the distribution of prizes among persons who have paid for the chance to win a prize”. The Internal Revenue Service considers raffles as a type of lottery with any winnings (less the cost of the raffle ticket(s) purchased) subject to federal taxation as income.
Each state has legislation regarding the number of allowed raffles and the limits for the value of raffle prizes. In North Carolina, nonprofit organizations must adhere to the following regulations outlined in § 14-309.15 (1):
- Limitations Per Year: Raffles are limited by law to four per year for a nonprofit organization.
- Cash Rewards: The maximum cash reward permissible or attainable for any single raffle is set at $125,000.
- Merchandise Rewards: For merchandise prizes that are non-redeemable for cash, the maximum fair market value for the prize may be $125,000.
- Dollar Value Limitations: The combined value of all cash prizes and the fair market value of prizes (including both cash and non-redeemable merchandise) must not surpass $250,000 within a single calendar year.
- Real Estate Rewards: A raffle may include real estate as a potential prize, with its highest appraised value capped at $500,000.
- Raffles and Bingo Events: The conducting of raffles alongside bingo is not allowed.
- Charitable Commitment: At least ninety percent (90%) of the net earnings (i.e., revenue minus costs related to awarded prizes) from a raffle must be applied by the nonprofit organization for religious, charitable, civic, educational, or other nonprofit endeavors.
- No portion of the raffle’s net proceeds shall be allocated for compensating individuals overseeing the raffle or renting a building for ticket reception or sales.
IRS Reporting Requirements
Form W-2G: The IRS mandates certain regulations for disclosing raffle winnings, with the requirement to report them as gambling winnings on Form W-2G when the value of the winnings is (2):
- $600 or more
- and at least 300 times the amount of the wager
Form W-2G must be provided to the IRS by the final day of February in the year following the raffle year. The recipients of the awards must also be provided this form by January 31st of the following year. If the winnings are less than $600 the Organization is not required to report these winnings to the IRS.
Withholding Taxes: If the winnings exceed $5,000 in fair market value, the nonprofit organization must withhold 25% of the winnings and remit income tax to the IRS.
- If the federal withholding amount is less than $2,500, then federal withholding can be paid when filing the Form 945 by January 31st of the year following the raffle.
- If over $2,500 in withholding, the tax must be paid using the EFTPS, the electronic filing process used by the IRS.
Withholdings are typically provided by the taxpayer at a rate of 28%. If the organization is paying the withholdings instead, a rate of 33.33% must be used. Cash prizes can be provided net of withholdings. Form 945, Annual Return of Withheld Federal Income Tax, must be filed with the IRS by January 31st of the year following the raffle.
Other Important Reminders
- Have raffle winners complete Form W-9 immediately after winning to ensure the organization has all details needed for completing required filings.
- Nonprofits must obtain an appraisal and retain documentation for any non-cash raffle item of $5,000 or more.
- North Carolina state tax withholding is not required to be withheld from the reportable winnings.
- Even if the raffle prize is given over several years, the total raffle winnings are reported in the year of the raffle drawing.
- Be clear in any communication about the raffle that the winnings are taxable as income and subject to federal tax withholdings per IRS requirements. IRS Publication 529 is a great reference for the winner.
While we’ve summarized some highlights above, it is vital for organizations to understand both federal and state laws regarding raffles to ensure compliance. Raffles are a fun way to promote the organization, get the community involved, and earn revenue to further the mission of the organization.
Contact a member of Gilliam Bell Moser LLP’s Not-for-Profit Niche team at 336-227-6283 for more information.
