Congratulations! You just won a radio contest and are entitled to a cash prize or some free merchandise. Everyone likes to get something for nothing, but do radio and television winnings come with a price? The answer is yes. Unlike gifts, which are tax-free for the recipient, the IRS classifies most prizes as taxable income. Depending on your tax bracket, the taxes you owe might make you question whether you should accept the prize or not.
If you have won a contest from a radio station, you will be required to pay taxes on any income earned. Merchandise you have been awarded is also subject to taxation.
Prizes as Taxable Income
In IRS Publication 525, which defines taxable and nontaxable income, prizes and awards are defined as taxable. A prize won from a radio or television quiz program is explicitly called out as being income that must be reported as "other income" on IRS Form 1040. If your prize takes the form of goods or services instead of cash, you must declare their fair market value as income. These rules also apply to winnings from raffles, lotteries and other types of contests. Although IRS Publication 525 does not mention a minimum prize amount, the radio station will likely need to file a Form 1099-MISC for prizes valued in excess of $600. Generally speaking, however, the IRS wants to hear about any amount of income you earn, even if that income (or prize) is not reported to them on a 1099-MISC form.
Reporting Contest Winnings
The IRS finds out about winnings of $600 or more when the issuer of the prize files IRS Form 1099-MISC for the year the prize is awarded. In 2017 and 2018, the amount in box 3 of Form 1099-MISC will contain cash prize income plus an amount equal to the fair market value of merchandise and services awarded as prizes. If you receive Form 1099-MISC after winning a prize, you’ll need to report the amount in box 3 as other income. The issuer of the prize is not required by law to withhold taxes on your behalf, so you may want to pay estimated taxes in the same year you receive the prize to avoid being penalized by the IRS for underpayment of taxes. Depending on your state, you may also be required to make early payments on your state income taxes.
Tax Options for Non-Cash Prizes
Winning a car or other large prize could leave you with a hefty tax bill. You have a few options when it comes to paying taxes on non-cash prizes. If you don’t have the funds to pay the taxes, you can sell the prize and use the proceeds for taxes. You can try asking the prize issuer for a cash settlement in place of a non-cash prize and then pay taxes from the settlement. You can donate the prize to charity and possibly avoid taxes. Finally, if you refuse to accept a prize because you don’t want the tax burden, you don’t have to report your prize or pay taxes on it since it wasn’t income.