It may seem a little harsh when you win that free holiday that the IRS Taxes comes knocking on your door asking you to pay tax on it. Well, unfortunately one of the hidden costs of doing sweepstakes is that you must pay taxes on sweepstakes winnings. So if you don’t want to have IRS tax problems be informed. The implications of not recognizing the need to pay taxes on sweepstakes winnings can be significant. You may be doing sweepstakes to supplement your income because you do not have much spare cash for those kinds of luxuries. Well, if you win some nice prizes be warned that they could come at a heft price as the taxes on some of the higher end physical non-monetary prizes could be significant.
Here are some simple steps that you can take to help you pay taxes on sweepstakes winnings and avoid any problems:
1. Keep good records of all your wins. It may help to record in a book information about the name and sponsor of each of the sweepstake contests, along with the date of payment or receipt of each of the prizes as well as their value.
2. By law any sponsors that give out prizes in excess of $600 will need to give you a 1099-MISC form. You will need to keep copies of these as they will be required when you come to fill out your tax form at the end of each tax year.
3. Record the market value of each win, as tax is payable on the fair market value rather than the cost to the sponsor.
4. If you enter many sweepstakes you may be incurring expenses such as telephone costs or mailing costs. You may wish to speak to a professional to see whether you should consider doing sweepstakes as a business so you can deduct these expenses from your winnings for tax purposes.
5. If you have many high value wins you should consider seeking professional help with your tax return as you will be required to submit all your sweepstakes information at that time and this can be quite complicated.
We certainly hope that you are successfully enough with your sweepstakes to have to pay taxes on sweepstakes winnings. We are sure with a bit of careful planning and assistance, you will not only be able to avoid difficulties with the IRS but be able to enjoy all the hard work you have put in.