Prize and Award Taxes

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Most Common Business Law Issues:

Are Prizes and Awards Taxable?

Generally yes. If a taxpayer wins a sweepstakes or receives a prize from a competition, these would be taxable income to the taxpayer. The amount included in income would be the fair market value of the items at the time they are received.

How Are Prizes Distinguished from a Gift?

Prizes and awards are usually given in recognition for some affirmative act by the recipient, such as entering into a contest, giving an exceptional performance in work, or inventing something new. A gift, on the other hand, usually depends on the intent of the donor. The donor normally makes the payment with detached and disinterested generosity. A payment primarily made out of moral or legal obligations or for some past services of the recipient is usually not a gift. Generally, a gift will require no actions from the the recipient.

Are There Exceptions to the Taxability of Prizes and Awards?

Yes. Certain qualified scholarships and fellowships are not taxable, even if they are prizes and awards. Furthermore, awards given for recognition of scientific, religious, artistic, literary, charitable, educational, and civic achievements are not taxable if:

  1. The recipient is chosen without any action on his/her part (e.g., entering into a contest or submitting work for review);
  2. The recipient cannot be required to provide substantial future services as a condition to receive the award; and
  3. The recipient must assign the award to charity (i.e cannot be used by the recipient or certain closely related members)

Thus, even Nobel and Pulitzer prizes are taxable to the recipient if they do not satisfy the above three conditions.

Are My Company Party Prizes and Awards Taxable?

Employee prizes and awards are generally taxable to the recipient, but some awards given for length of service and employee safety may be excluded from income if certain requirements are met. Employee awards that are very small in monetary amount and not given out frequently may also be a tax-free "de-minimus" fringe benefit to the recipient. Generally, there is no such thing as a gift between an employer and an employee. Most gratuitous payments between an employer and an employee will be scrutinized, as the IRS is especially wary of prizes and awards actually being disguised compensation.

Do I Need an Attorney to Help Me with My Tax Problems?

Tax laws are complex and ever-changing. Although there are various tax preparation softwares available to help you file your taxes, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can. If you are unsure about the characterization of your income or you need someone to represent you before the IRS, a tax attorney can help.

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Last Modified: 12-03-2014 04:27 PM PST

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