Nonprofit Accounting Basics
Raffles -- The Right Way
Raffles are gaining popularity for nonprofit fundraising. Often combined with a gala or other big event, raffles are accessible and fun. In a tight economy, attendees might hesitate to bid on a big auction item, but almost everyone can afford a raffle ticket. While everyone likes a nonprofit raffle, many nonprofits don’t realize the registration and reporting that raffles require. Many organizations give the winner a 1099 and hope for the best. If you’ve done that in the past, you’re not alone. Unfortunately, that’s not the right way to run a raffle. The IRS has increased its scrutiny of gaming activities and has partnered with many states to compare state gaming registrations to proper IRS reporting. If you run a raffle for your nonprofit, learn about the requirements that may apply to you and make sure you’re running it right. To get started, ask yourself the following questions:
Is our drawing a raffle?
A raffle is where the organization sells tickets, separately from tickets for admission to an event, and one of the tickets is drawn from all tickets to win a prize. Raffle tickets are tickets sold separately from event tickets. If everyone attending an event is eligible to win a prize drawing, then it’s a door prize, not a raffle.
Key question—were raffle tickets sold separately from event tickets. If yes, it’s a raffle.
Is raffle income taxable as UBIT?
Chances are, you were not granted exempt status to run raffles. Your raffle income is not related to your organization’s exempt function. Typically, raffle income is exempt from UBIT only because the activity is conducted with substantially all volunteer labor. Paid staff can be involved without ruining the exemption provided volunteer effort is also present. The unofficial guideline is “substantially all” means 85% or more. Nonprofits conducting raffles should keep records of volunteer participation to support 85% of the effort was conducted by volunteers and they did not receive any substantial benefit while volunteering.
Key question—did volunteers do 85% of the work? If yes, then it’s not UBIT.
Do we have to report the winner’s prize to the IRS?
If the prize is more than $600, and more than 300 times the ticket price, then, yes, the organization must report the winnings to the IRS using a W-2 G. For example, if raffle tickets are $50 and the prize is a $20,000 car, (greater than $50 x 300) then the organization would have to report the winnings to the IRS on a W-2 G. Unfortunately, it is not correct to give the prize winner a 1099.
Key question – was the prize more than 300 times the ticket price AND more than $600? If yes to both, then a W-2G is required.
How about withholding?
The organization must withhold and deposit federal income tax on the winnings. There are penalties for failure to withhold. Tax withholding is required when the prize is more than $5,000 and more than 300 times the ticket price. The withholding rate is 28% of the prize (up from 25% in 2010).
Key question – was the prize more than $5,000? If so, the organization must make a tax deposit.
How do you withhold tax on a $20,000 car?
The nicest raffles pay in the tax for the winner, making the prize even bigger. Others offer the winner the choice of taking the prize or a cash equivalent, allowing the winner to pay the tax and keep the rest of the cash. The organization must do one of two things. Either: 1) ask the winner to hand over $5,600 before they get the car; or 2) gross up the prize to $27,778 and pay in federal income tax of $7,778. ($20,000/ (1 - .28) = $27,778.)
Do we have to register with the state?
Organizations holding raffles often have to file a state registration. Sometimes states have a registration threshold based on the level of expected raffle receipts. For specific information, contact the state where the raffle is to be held.
Key questions—where will the raffle be held? What are the registration requirements in that state?
Running a raffle can be a good source of revenue and a good fundraising tool. It gets many people involved in supporting the organization and generates excitement and fun. To avoid penalties and hassle, use these questions as a starting point to make sure you know the registration, reporting, and withholding requirements related to your raffle. For more information, you can read IRS Publication Number 3079, Tax Exempt Organizations and Gaming, available on irs.gov.
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