Prizes, Taxes and 1099s, Oh My!
- Are you thinking of giving away prizes, or coupons as prizes,that have a total cash value of more than $600, to any single individuals?
If so, beware, you will have to send out a 1099 to any indvidual that you give more than $600 to in prizes including coupons that have a cash equivalent value of more than $600.
- Have you won a prize or coupons that have a cash value of more than $600 from a single source?
If so, you may receive a 1099 on that prize or those coupons.
Last year, Bob Choate, a Houston resident learned this lesson the hard way. While attending a Houston Astro's game, he won a year's supply of coupons for free coffee, and a donut, or 1/2 dozen donut holes.
Earlier this year, as the winner of a year's supply of calorie busting coupons, he received a 1099 showing that he owed taxes on $927.61 of income. This was the cash value of the coupons for the free donuts and coffee for a year.
The Federal tax code states that prizes, awards and yes coupons as prizes, be declared as taxable income. A 1099 must be issued to any individual you give a prize to whose winning exceeds $600, and that individual must declare those winnings on his or her personal tax return.
Of course, if you do win a years supply of coupons and the cash value does exceed $600, you do have the option of declining the prize.
If you would like to give away prizes, or coupons as prizes, and you do not want to send out 1099s, you can keep the total cash value that any single individual is allowed to win to less than $600.
If you are a business owner and want to promote your business by giving away coupons, gift cards or free services, you may want to consider keeping "the fair market value" of prizes to any single individual below the $600 threshold.
Taxed income, especially unplanned taxed income, can cause negative reactions. Rightly or wrongly, your prize will be linked to taxes and most likely a negative response from the recipient. Probably not the response you would like to receive from prize winners.
If you are a business owner and have questions about prizes or 1099s contact us we can assist.