Backup Withholding: An organization is required to withhold 28 percent of the total proceeds if (1) the prize is otherwise subject
to reporting (i.e., the amount of the prize, less the amount wagered, is $600 or more and 300 times the amount of the wager), and
(2) the winner fails to furnish a correct taxpayer identification number (social security number, individual taxpayer identification
number, or employer identification number). This is called backup withholding.
Noncash Prizes: For noncash prizes, the winner must pay the organization 25% of the fair market value of the prize minus the
amount of the wager.
Example 3: Jason purchased a $1 ticket for a raffle conducted by X, an exempt organization. On October 31, 2004, the
drawing was held and Jason won a car worth $10,000 (fair market value). Because the prize exceeds $5,000 and the
fair market value of the car is $10,000, the tax on the fair market value of the prize is $2,499.75 [($10,000 minus $1
ticket cost) x 25%)]. Jason must pay $2,499.75 to X to remit to the IRS on his (Jason’s) behalf. X would indicate the fair
market value of the prize ($10,000) in box 1 and the amount of the withholding tax paid ($2,499.75) in box 2 on Form
W-2G.
Organization Pays Withholding Tax: If the organization, as part of the prize, pays the taxes required to be withheld, it must pay tax
not only on the fair market value of the prize less the wager, but also on the taxes it pays on behalf of the winner. This results in
a grossed up prize requiring the use of an algebraic formula. Under this formula, the organization must pay withholding tax of
33.33% of the prize’s fair market value. The organization reports the grossed up amount of the prize (fair market value of prize
plus amount of taxes paid on behalf of winner) in box 1 of Form W-2G, and the withholding tax in box 2 of Form W-2G.
Example 4: If in Example 3, X pays the withholding tax on Jason’s behalf, the withholding tax is $3,332.67 [($10,000
fair market value of prize minus $1 ticket cost) x 33.33%]. X must report $13,333 as the gross winnings in box 1 of
Form W-2G, and $3,334.67 withholding tax in box 2.
Reporting and Paying Tax to the IRS
The organization must use Form 945, Annual Return of Withheld Federal Income Tax, to report and send withheld amounts to the
IRS. This is NOT the same form used to report Federal income tax withheld and FICA with respect to employees. Form 945 is an
annual return, and is due January 31 of the year after the year in which the taxes were withheld (for example, for taxes withheld in
2004, the return would be due January 31, 2005). Separate tax deposits are required for payroll and non-payroll withholding. Be
sure to mark the Form 945 checkbox on Form 8109, the Federal tax deposit coupon.
The organization must list the EIN (employer identification number) of the organization conducting the raffle on Forms W-2G,
1096, and 945. If you have not secured an EIN, you may apply for one on Form SS-4, Application for Employer Identification
Number, available from the IRS. You may also apply for an EIN on-line at www.irs.gov , under the topic Employer ID Numbers on
the Businesses Contents page.
For more information, see IRS Publication 3079, Gaming Publication for Tax-Exempt Organizations, or call EO Customer Account
Services at 1-877-829-5500 (toll-free). IRS forms and publications can be ordered by calling toll-free 1-800-TAX-FORM (1-800-829-
3676) or from the IRS Web site (www.irs.gov ).