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, raffles are limited by law to four per year for a nonprofit organization. North Carolina also limits the maximum value for any one raffle, as well as in total for both cash and non-cash prizes.
IRS Reporting Requirements
Form W2-G: The IRS has specific rules for reporting raffle winnings. Winnings are required to be reported on Form W-2G as gambling winnings if the value of the winnings is:
- $600 or more
- and at least 300 times the amount of the wager
Form W-2G must be provided to the winner and the IRS 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 and remit income tax to the IRS.
- If the federal withholding amount is less that $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 38.88% 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.
- In the state of North Carolina, no less than ninety percent (90%) of the net proceeds of a raffle (receipts less cost of the prizes) shall be used by the nonprofit organization or association for charitable, religious, educational, civic, or other nonprofit purposes. None of the net proceeds of the raffle may be used to pay any person to conduct the raffle, or to rent a building where the tickets are received or sold.
- 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.