Does the winner of prizes & cash have to pay taxes on their winnings before receiving them? Or later?

Question

I'm planning to enter a fitness contest and the winner receives a total of $50,000 in prizes which includes $40,000 cash, fitness equipment, and health supplements. Do the taxes have to be paid by the winner upfront, are they taken out of the prize money, or are the taxes paid at the end of the year? I may not be able to afford to even win the contest. LOL Too funny.

I found this information on the irs.gov website which says the winner does need to pay taxes, but it doesn't say when.

http://www.irs.gov/businesses/small/international/article/0,,id=10619
4,00.html

How can I calculate the total taxes on $50,000 worth of prizes? Does anyone know how much that would be?

Answer 1

Many contests deduct taxes from the prize, but they usually withhold 10% probably isn't enough to cover it. To calculate what the tax would be, find your marginal tax rate from last year (also called "bracket" - the percent that your highest dollar of earnings was taxed at last year). You can't just divide your total tax by total earnings, since the first many thousands of dollars aren't taxed at all, and the rate varies from there on up. Multiply your tax bracket percent by $50,000 and you'll be close. Might be more than that if the prize kicks you to the next bracket which it might - depends on your other income, marital status, and a few other things. With a prize that large, federal income taxes will probably be 25-28% of the total prize.

If the contest sponsor doesn't deduct enough, you're responsible for filing estimated taxes and paying the difference at the end of the quarter in which you receive the prize.

There might also be state taxes, depending on where you live.

But with $40,000 of the total being cash, you should have enough to pay the taxes.

Answer 2

Prizes and Awards

Prizes and awards are amounts received primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, or are received as the result of entering a contest. A prize or award is taxable to the recipient unless all of the following conditions are met:

1. The recipient was selected without any action on his or her part to enter the contest or proceeding,
2. The recipient is not required to render substantial future services as a condition to receive the prize or award, and
3. The prize or award is transferred by the payer to a governmental unit or tax-exempt charitable organization as designated by the recipient.


Since you voluntarily entered the contest, yes you owe. My best advice is IF you win, take some of the cash and IMMEDIATELY make a tax payment.


Here is how you estimate.
How much did you make last year?
How much tax did you pay last year?

Tax dividided by income = rough percent of taxes

multiply that by $40000 and that is what you should pay at a minimum.

Example, you made 50000 last year and paid 10000 in taxes.
10000/50000 = .20

.20*40000 = 8000

Pay at least 8000.

Answer 3

The same question comes up again

Answer 4

Maybe it's bad

Answer 5

Thank you for the replies, very much appreciated