Do you host giveaways on your blog? Do you enter giveaways online?
THIS SERIES IS FOR YOU!!
Helena – a lovely, sweet, smart Certified Public Accountant is HERE this week. All week. 3 posts + a totally IRS-rules based giveaway at the end. You can subscribe by email in our sidebar and follow along on facebook & twitter too!
Hosting a giveaway on your blog is becoming increasingly popular. Everyone loves winning, so a good giveaway relevant to the focus of your blog can bring you a lot of traffic.
Unsurprisingly, there are tax consequences. There are always tax consequences!*
Today, we will focus on the consequences for the winner of the contest you are hosting on your blog (and your responsibilities as the contest-host(ess)). On Wednesday we will discuss the nitty-gritty of making sure your blog giveaway is set up legally.
First things first. Prizes are Income.
In the United States, income is taxable unless specifically excluded (e.g., tax-exempt bond interest). Items of value won in contests, sweepstakes, or lotteries are taxable income to the recipient in the amount of their fair market value at the time they were won. For example, if you won a pair of pinking shears from a craft site giveaway, their current retail price at the time you received them (i.e., how much you’d pay if you’d bought them rather than won them) is taxable income.
But prizes are gifts! Nope. The IRS defines gifts in the same manner as most of us would – items given out of affection with no requirement of reciprocity or consideration. Your mom may buy you new pinking shears because she loves you, and that’s awesome. No tax consequences there. The craft blogger who sent you the pinking shears you won in a contest does not have those same feelings of maternal warmth. The shears are still awesome, but they are now income.
Requirements of the Blogger
Any giveaway with a value of $600 or more must be reported to the IRS and the winner on a Form 1099-MISC. This filing is purely informational but it puts the IRS “on notice” to look for that income to be reported on the winner’s Form 1040.
To issue a Form 1099-MISC, you will need certain information from the winner: full name, address, and social security or tax ID number. It may be easiest to get this from them before you put their prize in the mail (as they are more likely to be helpful when awaiting their goodies!).
Forms 1099-MISC are due:
- To the winner: by January 31 of the year after the prize is won. For example, for someone winning a prize in 2012, you owe them their copy of the Form 1099-MISC by January 31, 2013.
- To the IRS: by February 28 of the year after the prize is won. To encourage electronic filing, this due date is extended to April 1 if you file electronically.
In addition, there are some “best practices” that aren’t necessarily legal requirements but are still good to implement.
- List the cash value of any prize on your site. Sure, the winner could do a little research to find the retail value, but you likely know as you are dealing directly with whoever is sponsoring the prize, so just help a brother (or sister) out. This is useful even if the prize is less than $600 as any prize of any amount is income to the winner.
- Include language on your blog pertaining to Forms 1099-MISC. This can be small language at the bottom of each post featuring a giveaway or on your “About” page. Mention that you will be collecting the required information from winners of prizes over $600 so everyone knows the rules before playing.
Requirements of the Winner
If you receive a Form 1099-MISC, you are required to report the income listed on your annual tax return. The IRS also received a copy of this Form 1099-MISC, so they are waiting for it to show up on your return!
Prizes valued at less than $600 should still be reported as miscellaneous income. As discussed above, they are income in the amount of their retail value when you won them. Hopefully, the blogger listed this value on his or her blog when the contest was hosted, but if not, contact the store or company that sponsored the giveaway to get an idea of retail price.
This prize income amount should be reported on Line 21 of your Form 1040.
Kinda sounds like a buzzkill? IRS audits are a bigger buzzkill, believe me.
Questions? Leave them in the comments or contact me here. Be sure to check back on Wednesday to make sure your blog giveaways are legal!
*Please note that the tax consequences discussed in this post pertain to the United States. Naturally, every country has its own laws, so be sure to check your local jurisdiction if you live outside the U.S. of A.